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Industry Insights
April132021
Is this the end of the American mall as we know it?

Jigar Shah, CPA

4.13.21 | Industry Insights

The COVID-19 crisis has changed the way we live now and some of the protocols put in place to fight the pandemic will likely continue well into the future. COVID-19 has also changed the way we do business, effecting everything from global supply chains to e-commerce to brick and mortar retail outlets. It has also accelerated a trend away from the traditional mall.

But what about your local mall? The impact of the pandemic on retail stores and shopping malls has been far-reaching, exacerbating and reinforcing certain pre-COVID-19 trends and changing the way malls do business generally. In the early days of the crisis, malls and non-essential retailers were forced to shutter. By March 18 of last year, Simon Property Group, the biggest mall owner in the U.S., moved to shut down its operations—losing a reported 10,500 shopping days across all of their properties in the second quarter of 2020 alone. As the crisis wore on, malls continued to take hits as a number of high-profile mall staples—such as Brooks Brothers, JCPenney, J.Crew and Neiman Marcus—were forced to file for Chapter 11 bankruptcy protection, while other high-end retailers, like Lord & Taylor, were compelled to close down altogether. In efforts to avoid a similar fate, some major retailers, like Macy’s, are pursuing a post-mall strategy that consists of opening up stand-alone department stores that are not anchored to larger malls.

COVID-19 has also taken an obvious toll on the other anchors of the American mall experience: movie theaters and casual restaurants. The damage to the American mall is likely to be permanent. The firm Coresight Research has estimated that 25% of America’s roughly 1,000 malls will close over the next three to five years.

Impact on the Retail Footprint

The forecasts for other retail sectors is not so grim. As the pandemic continued, some big box retailers have seen their businesses thrive. Companies with a focus on home improvement (like Home Depot, Lowe’s, and Target) and self-improvement (like LuluLemon and Dick’s Sporting Goods) saw their profits soar as people were forced to stay home.

During COVID-19, the customer experience evolved from one that prioritized a hands-on approach to one that minimizes contact between retail employees and their customers. The proliferation of contactless checkouts is one prominent example of the way retailers are now doing business. Some big box retailers like Lowe’s have installed smart lockers that enable customers to pick up the items they browsed, ordered, and paid for online at pre-assigned in-store lockers. “Automated lockers require the least store labor and provide the most store and customer flexibility, all while being contactless—they’re the ideal solution,” says Penny Lasater, head of Package Concierge Retail.

The rise in e-commerce as an alternative to in-person shopping has led to changes in the way retailers use their stores. Companies like GAP and Target have repurposed many of their brick and mortar locations as online fulfillment centers, where customers can pick up the items they ordered online. According to the data analytics group GlobalData, 68% of shoppers say that in the future, they plan to use curbside pickup at stores and 60% say they plan on picking up their online purchases from inside stores. If this data holds true, retailers will need to assess their real estate, as well as their inventory, needs going forward and determine if, and how, they will repurpose their storefronts to better accommodate the needs and wants of their customers.

The Opportunities and Challenges of Repurposing

With malls increasingly moribund, owners are seeking ways to repurpose their properties. A recent study by CBRE found that retail-to-industrial property conversions have picked up significantly over the past year. So-called “dead malls” particularly in large Midwestern markets like Milwaukee, Cleveland, Chicago, and Omaha have become attractive targets for warehouse developers. Some big box retailers are pursuing a strategy that shrinks their retail footprint which allows them to dedicate more of their space for fulfilling online orders.

“While the showroom area of the store may shrink,” observed Brookfield Property Chief Executive Brian Kingston, “retailers are using more space for inventory, returns, and fulfillment, making the distribution channel itself less relevant, but the location of its physical real estate more important than ever.” However, there are logistical challenges in pursuing a mixed use approach that combines retail and warehouses focused on shipping and order fulfillment. Another challenge, as it relates to the American mall, is that malls may lack the requisite number of loading docks to serve effectively as distribution centers.

Redevelopment of empty malls into distribution centers for online retailers like Amazon is likely to continue. This trend was well underway before the pandemic started. According to Coresight Research, between 2016 and 2019, Amazon converted 25 shopping malls into distribution centers. However, this is not the only way malls are being repurposed. Some empty malls are being converted to office space, retirement communities for the ever-growing population of American seniors, and in other creative ways.

While repurposing malls sounds great, many developers are finding that executing on this strategy doesn’t always go as planned. The cost of converting such large spaces can be cost prohibitive, involving hundreds of millions of dollars in construction and labor costs. In some cases, local governments are stepping in to facilitate conversions, which could result in more red tape and other complications. As such, it is important for retailers and real estate owners to perform their own due diligence and assess the pros and cons of converting their properties. What is clear is that the traditional American mall, as well as the retail industry as a whole, has likely changed for good and the current environment is rife with both opportunities and challenges.

Questions: Contact Jigar Shah 212.331.7499 | JiShah@berdonllp.com or your Berdon advisor.

Berdon LLP New York Accountants

 

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