Death of a Mall?
Historically Mall developers seek “anchor” tenants; major retailers who draw people to their stores though their advertisements and merchandise mix. To entice them to open in their location landlords offered “sweetheart” leases with very low rents; the tenants do pay their share of the taxes and Common Area Maintenance charges. Smaller size merchants (inline tenants) seek to open their business near these anchor stores to get the benefit of the customer traffic; and pay high rent to do so. With one or more anchors and 25 -100+ smaller stores you have a regional shopping center with the largest ones, often enclosed, called Malls.
But what happens when anchor stores like Sears, Macy’s, Kmart, JC Penny, Sports Authority close, “go dark”? This can be devastating to the landlord because in most cases the inline tenants have Co-Tenancy clauses in their leases.
Co-Tenancy clauses can take many forms, generally they allow the tenant, when the anchor store goes dark, to reduce their rent payment to a predetermined amount or convert their rent obligation to a predetermined percentage of their sales. They may also allow the tenant to terminate their lease if the anchor store is not rented within a certain time frame. This however can create another issue, what if the replacement anchors business causes the shoppers demographics to change and no longer “feeds” the tenants business; their lease may allow termination in this case.
Landlords lose their anchor store, rent revenue decreases and then small stores start leaving; is this the death of that shopping center or mall? We currently have 1,200 major shopping malls in the United States; experts predict 25% (roughly 300) will close within the next five years.
Mall owners have other alternatives; with many of the anchor leases started 10-20 + years ago they may be able to rent the anchor space today for more money. With many retailers also doing business online the demand for large stores has changed to downsizing; they may put 5, 10 or more new tenants into that space.
With a shift to Millennial aged consumers the definition of who is an “Anchor store” is changing. Owners are rethinking and repurposing their malls with the new consumer draws being dining, entertainment and grocery stores, and these new anchors pay real rent too. In the King of Prussia mall in Philadelphia Outback and Yard House restaurants now occupy the old Sears location; Fig and Olive restaurant will be occupying part of the formers Saks Fifth Avenue store. Food courts still exist but there is considerable demand for casual dining restaurants with bars and a social atmosphere.
Entertainment is another new anchor; movie theaters, bowling alleys, fitness centers, indoor kid’s theme parks. The biggest shift is to add grocery stores to the mall environment. Wegman’s Food Markets (supermarket) has leased the 194,000 SF former JC Penny store in the Natick Mall in Boston. They will occupy 125,000 SF themselves and sub-lease the remainder of the space to smaller stores.
Some retailers are doing exceptionally well and expect significant new growth in 2018. Just to name a few: Discounters, Dollar General and Dollar Tree; Grocery stores, ALDI’s and LIDL; Clothing, American Eagle, TJ Maxx, and Burlington; Pets, Petco and Pet Smart; Phones T Mobile and Sprint: Specialty, Dicks Sporting Goods, Harbor Freight, and Advanced Auto Parts. Don’t be surprised to find some of these typically standalone stores now in your mall. Giants like Wallmart and Cosco are also planning expansion this year.
Retail is not dying it is just ever changing. We have learned that considerable business may be done over the internet but people still want to be able to visit “brick and mortar” stores. Going shopping at “the mall” is a fun and social experience.
Ed Smith is a Commercial and Investment Real Estate Continuing Education Instructor, Corporate and Private Trainer, Speaker, Author, Broker and Consultant; he may be contacted at CRETeach@charter.net or at www.CommercialEd.com
Edward S. Smith, Jr., Real Estate Broker
Licensed in New York and Connecticut
Smith Commercial Real Estate
Berkshire Road, Sandy Hook, CT