The American mall experience is evolving before our eyes — here's a virtual sneak peek

Yahoo Finance Video
a year ago

By Sarah Paynter and Brian Sozzi

Opinions vary wildly on the fate of malls across the country in the wake of the devastating COVID-19 pandemic.

In the one corner are the stone-cold realists such as veteran retail executive Jan Rogers Kniffen who see the writing on the wall when it comes to the great American mall. But on the other end are the more optimistic like Jackie Soffer, chairman and CEO of Turnberry, a 50-year-old real estate development company that owns several prized retail sites, including Florida’s upscale Aventura Mall. Soffer only sees opportunities in the aftermath of COVID-19.

“I don’t think it’s going to be easy. But the [mall] tenants will try. People want to go back to normal, whatever normal may look like,” Soffer says. “People like the experience of seeing other people.”

Aventura Mall, for instance, is a look into what type of mall can survive — and ultimately thrive — post-coronavirus. It caters to higher income shoppers with its Hugo Boss and Breitling shops, fine dining, snazzy artwork and the occasional piano player who serenades shoppers. These shoppers want the experience of buying an expensive product like a Breitling watch.

While Kniffen thinks malls will continue to serve a purpose in the community as we venture back outside after quarantines, extended closures have rendered them increasingly obsolete as the shift to online shopping accelerates individuals’ desires to avoid large crowds out of fear of getting the virus.

“A bunch of malls will start going away. And they will start going broke,” says Kniffen, who is now CEO of retail consultancy J. Rogers Kniffen Worldwide Enterprises. “We have 278 great malls in America, the rest of them are in big trouble. I used to say 300 malls need to go away. But now I say 500 malls have to go away.”

But whether realist or optimist, every retail pro Yahoo Finance chatted up for this story agreed on one thing: America’s mall scene will look very different after one of the deadliest pandemics in recent history. It has to — and, it’s not as if change wasn’t well underway before people knew what social distancing even meant.

‘A thinning of the herd’

The pandemic just sped up the day of reckoning for vast stretches of zombie real estate. America had a glut of retail space before COVID-19, with twice as many square feet dedicated to shopping as any other country in the world. Retail is oversupplied by six square feet per capita compared to Europe, according to the International Council of Shopping Centers for U.S. merchants, a New York-based retail trade group.

About 300 of America’s 1,100 malls are in distress right now, according to John Schupp, principal at Avison Young, a Toronto-based commercial real estate services firm.

Tennessee-based mall owner CBL & Associates Properties, which has over 100 malls in the Southeast, said last week that it plans to file for bankruptcy. The mall operator collected only 27% of tenants’ rents in April and missed an $11.8 million interest payment on June 1, according to a recent financial report.

“Given the impact of the COVID-19 pandemic on the retail and broader markets, the ongoing weakness of the credit markets and significant uncertainties associated with each of these matters, the Company believes that there is substantial doubt that it will continue to operate as a going concern,” CBL said in the report.

In the U.S., 20%-25% of retail spaces will become vacant in the next few years due to the pandemic, said Scott Crowe, CIO and portfolio manager of CenterSquare Investment Management, a Pennsylvania-based investment management firm.

Half of the malls in America will disappear over time, said Najla Kayyem, senior vice president of marketing for Pacific Retail Capital Partners, a California-based retail investment and management company.

Landlords have resisted evicting tenants who can’t pay amidst the crisis, but some tenants may end up being evicted because they failed to pay, while others will choose not to renew their lease, said Omar Eltorai, Reonomy market analyst.

High-profile retailers J.C. Penney, Neiman Marcus and J. Crew filed for bankruptcy in May. All three have been crippled by state-mandated store closures that exposed terrible financial positions. The three are expected to shutter hundreds of stores and emerge from bankruptcy radically smaller. Pier 1 decided to liquidate in May. Department store giant Macy’s is on the cusp of another large store closure campaign no thanks to the health crisis. The store closures and bankruptcies are bad news for malls which rely on retailers to fill space.

“It’s gonna be bad. The mall industry and the tenants that are in malls came into this already precariously positioned on a knife’s edge, and the shutdown has pushed them over the edge. Department stores will fold. They are vulnerable — they can’t go a month or two without sales,” said Crowe.

“A meaningful percent of space will be vacant. In certain instances, those malls that were struggling before may never reopen. The pandemic is an inflection point, bringing together and accelerating the trends we were observing in the industry before,” said Boneham.

Experts predict that there will be a consolidation of retail into the newest and highest quality locations with the best visibility and access.

“What we are going to see is a thinning of the herd. Simon, Brookfield, Lennox, New York Roosevelt Field Mall, Daybrand — the fortress malls, the best of the best — they are not going anywhere. They have billions in the bank to evolve the mall concept,” said Schupp.

Here comes the hand sanitizer

For those malls that emerge from the pandemic, they may be among the cleanest places to visit.

At about 200 Simon Property Group malls and shopping centers, including the gargantuan King of Prussia mall in Pennsylvania, shoppers will hear frequent audio announcements, reminding customers to social distance. Public service announcements were part of the Indianapolis retail giant’s 10-page plan for U.S. malls, which were among the first in the country to reopen. Simon’s malls provide free masks and sanitizing wipes, take employees’ temperatures, sanitize counters and reduce occupancy to 50 square feet per person.

“I was happy they [Simon Property Group] were taking the pandemic seriously. It did make me feel more comfortable that they were enforcing social distancing, offering hand sanitizer and checking temperatures,” said Jess Martyna, a private equity attorney from New York City and a recent shopper at New York’s Woodbury Commons, which is owned and operated by Simon.

Across the U.S., malls and other retail centers are turning to social distancing and outdoor options to make customers feel safe enough to re-enter their properties. The shopping experience will in many respects resemble those pioneered by grocery stores during the pandemic to reduce infection risks.

Think one-way lanes that can prevent people from breathing or coughing on each other as they pass. Or contactless payment technology, using smart credit cards, Apple Pay or order-ahead apps. Masks, gloves and hand sanitizer will be plentiful among staff and customers, and some retailers will even replace their heating and cooling systems to provide cleaner air, experts say.

’Give people a reason to get off the couch’

In recent years, mall owners have ramped up the experience quotient to attract shoppers. Malls now include gyms, mini golf and even laser tag. Malls plan to double down on that business model to lure shoppers, who have become even more addicted to online shopping during the pandemic.

Soffer tells Yahoo Finance you could see sports arcade player TopGolf become an anchor tenant. Bowling alleys in malls are also possible — but not the traditional kind seen in internet images from 1985. Think one with only 25 lanes and a large amount of space devoted to a bar and club. In other words, Dave & Busters (another possible mall tenant, people tell Yahoo Finance) on steroids.

Upstart fitness equipment player Mirror (now owned by athletic apparel retailer Lululemon) and Gwyneth Paltrow’s lifestyle brand Goop could also make a push into the mall, Soffer thinks. In this case, the mall would help bring cool new brands to shoppers — ones that are more interactive than a traditional apparel store.

“You have to give people a reason to get off the couch,” retail designer Tom Ertler of Miller Zell says.

On the other hand, parts of some malls could be completely bulldozed to reset the experience. Experts tell Yahoo Finance hotels and mixed-use residential communities could appear in former anchor stores. That would be welcome news to mall tenants as it provides a built in set of shoppers.

“The malls that survive will have to take those lots and re-develop them into something or tear them down,” says Kniffen.

Restaurants at malls are using parking lots, roofs, ballrooms and atriums to sprawl out, leaving room for social distancing and providing as much of an outdoor experience as possible in an effort to drive business.

“People are more comfortable being outside. With the breeze blowing, you are less likely to have contaminating particles,” said Terry Montesi, chairman and CEO of Trademark Property Company, a Fort Worth-based retail investment company. “People will want to be outdoors more than ever.”

One New Jersey mixed-use retail center, Bell Works, is putting plants between spread-out cafe tables, instead of barriers, to maintain a sense of ambiance in its locally-owned Italian, Japanese and health food restaurants.

Large retail centers will add parks and plazas to set the mood. Common gathering spaces draw shoppers to the Avalon Shopping Center in Alpharetta, Ga. and Market Street shopping center in Woodlands, Texas. Pop-up stores, art installations and programming like yoga and barre classes will be a part of malls that succeed in the next few years, experts say.

Jackman Reinvents, a retail consulting company based in Toronto, took out 25%-35% of merchandising space in Joann Fabrics and Staples stores, replacing them with crafting centers and co-working spaces — prompting a double-digit growth in sales for both Joann and Staples, as traffic to the stores increased and customers became inspired to start new projects, said Joe Jackman, founder and CEO of his namesake consultancy.

But experiential retail can come in conflict with clinical, contactless coronavirus management tools. So expect the shopping experience to be a bit clunky, if not annoying at first. Malls are trying to find ways to balance customer service and safety.

“Retailers that succeed are prioritizing safety measures that don’t feel scary and clinical. They are layering in surprise and delight — clinical measures should be secondary,” said Melissa Gonzalez, Lionesque Group and shareholder of global architect firm MG2.

Like we said, clunky. Don’t expect to get in and out of the mall quickly. But if you want to make a day of it, the experiences could be found at the better malls.

Better use of space

Curbside pick-up at the mall is among the new normal right now at the likes of Macy’s, Coach and Dick’s Sporting Goods. One could expect the mall to better cater to the 24/7 shopper in the years ahead.

Empty stores will be used as warehouses by retail brands to serve online orders. A multi-level Macy’s could be a “perfect distribution hub” for last-mile retailers, said Pam Boneham, managing director and head of capital strategies for Barings Real Estate.

Retailers are even imagining a hybrid scenario, where customers can come in and try things on at a store that has been converted to a distribution center, so they can still touch and feel a product before buying, according to Terrell Gates, founder and CEO of Virtus Real Estate Capital, an investment management firm based in Austin, Texas.

In the end, the concept of a community gathering place known as a mall still makes sense, experts believe. But the days of malls simply being stuffed with pizza places, apparel stores and various kiosks are over. COVID-19 hasn’t killed the mall, just sped up its rebirth into something far more useful for the modern era.

And don’t expect big box stores to save the day, but there is e-commerce giant Amazon. Known for stark images of its broken-down escalators, ceilings and storefronts, Rolling Acres Mall in Akron, Ohio, has been vacant since 2013. Amazon has reportedly spent $100 million to rehabilitate the “dead mall” into a 700,000-square-foot distribution center. Amazon is also reportedly in talks with Simon Property Group about turning some of the mall operator’s anchor department stores, former Sears and J.C. Penney locations, into Amazon distribution hubs.

“These malls that have Macy's, Sears or J.C. Penney that are going away..., there aren’t enough Costcos (Planet Fitnesses and Dick’s Sporting Goods) in the country to fill all those boxes,” Kniffen says. “A lot of those malls just won’t have anchors.”

But the malls may have a hotel or Amazon distribution center.

Correction: Trademark Property Company did not rehabilitate the Highlands Mall in Austin, Texas. That fact was misstated in an earlier version of this article.

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