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US Mall Owners

With retail sales increasingly tilting towards online commerce and large department stores facing mounting uncertainty as to the viability of their business model, it’s not surprising to see a recent report in the Wall Street Journal that a growing number of mall owners in the United States are looking to reinvent their retail mall environments without traditional department stores stationed as anchor tenants.

With retail sales increasingly tilting towards online commerce and large department stores facing mounting uncertainty as to the viability of their business model, it’s not surprising to see a recent report in the Wall Street Journal that a growing number of mall owners in the United States are looking to reinvent their retail mall environments without traditional department stores stationed as anchor tenants.

According to the real estate tracking company CoStar Group, over the last decade, as mall-based anchor tenant leases have come up for renewal, department store anchors have been replaced by non department store occupants 54% of the time. This represents a striking development in the world of retail shopping, where malls were historically built around and based upon the presence of a thriving department store anchor.

The trend is driven by simple business logic: department store sales are falling while specialty store sales are still continuing to rise. Over the decade from 2005 to 2015, department store sales dropped by 10% compared to a 33% sales increase for specialty retailers. For mall owners, whose rental income is often directly tied the level of sales generated by their tenants, it’s hard to fight against a trend like that.

While reconfiguring mall properties to adapt to the loss of a department store anchor can entail significant upfront cost, the redevelopment may often prove well worth the effort simply based on the base rents that mall owners can charge. Department stores often benefitted from sweetheart deals that resulted in net lease rates as low as $2 per square foot whereas non-department store occupants will typically pay base rents in the range of $15 to $20 per square foot or at even significantly higher rates in the event the mall traffic is sufficient to support additional specialty retailers.

According to the Wall Street Journal report, mall owners are showing a lot of creativity in how they are going about the reinvention of their mall properties without the attraction of a department store anchor, including supermarkets, fitness centers, sporting goods retailers, movie theaters and entertainment oriented attractions, such as Dave & Buster’s restaurants. At a large mall in Orlando Florida, the anchor space vacated by Nordstrom’s department store was reconverted to accommodate a family attraction called the Crayola Experience. So far from presaging the decline of malls themselves, the decline of department store anchor tenants seems to be providing mall owners with a chance to reinvent and reinvigorate their properties, with tenants more likely to attract today’s retail shoppers.

And one more recent development that shows there’s still considerable upside in malls properties and commercial retail more generally – now online retailers are showing increasing interest in establishing a brick and mortar presence. In perhaps the most surprising twist, Amazon is now reported to be preparing to lease space in the Hudson Yards retail corridor in New York City for a brick and mortar store for Amazon Books. Amazon has already been experimenting with this concept elsewhere, with a first store already up and running in Seattle and two more locations in the works for San Diego and Portland. The Amazon strategy contemplates a retail presence that integrates the offline and online shopping experience, creating an environment where consumers can put their hands on and play with some of Amazon’s best selling products, including the Kindle, Echo and Fire Tablet.

Just how extensive a bricks and mortar footprint Amazon intends to create remains to be seen – whether these new stores will be as integral to Amazon’s strategy as they have been to Apple – but in any case it bodes well for mall owners around the country that, far from being down for the count, a brick and mortar presence is still scene as highly valuable for even the most forward thinking and successful of online retailers.

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