The great mall transformation is officially on. This weekend’s reports that Amazon is negotiating with Simon Property Group to take positions at anchor tenant spaces for fulfillment centers signal the beginning of major changes at retail centers across the country.
The reports from several sources indicate that Simon has been negotiating with Amazon to turn some of its department stores into Amazon distribution or fulfillment hubs. The talks have focused on JCPenney and Sears. Both have filed for bankruptcy. According to The Wall Street Journal, Simon malls have 63 JCPenney stores and 11 Sears stores, according to its most recent public filing in May.
The move is the first major action on reshaping malls after months of speculation about how anchor tenants can be replaced or converted into different uses. It also comes after every major traditional mall tenant has been in serious financial trouble or declared bankruptcy. Some kind of transaction between JCPenney and Amazon has been rumored since the pandemic lockdowns in mid-March.
In addition to signaling a new phase in mall redevelopment, the Simon-Amazon talks clarify the consequences of three major trends.
First, the intention of real estate investment trusts (REITs) like Simon and Brookfield’s bailing out of retailers is now clear. JCPenney’s suitors have ranged from private equity firm Sycamore Partners, which owns department store Belk, and a partnership between Simon Property Group, Brookfield Properties and Barneys New York parent company Authentic Brands. The REIT interest was not clear until the Amazon talks surfaced. Apparently, the interest is not in keeping retailers like JCPenney going as retail concerns as Simon did with Forever 21. The interest is in turning their real estate into new opportunities such as the Amazon fulfillment centers.
“To replace department stores, mall owners considered schools, medical offices and senior living,” Camille Renshaw, chief executive officer of B+E, a real estate investment brokerage firm, told the WSJ. “With the current pandemic, industrial is the only thing left now.”
The second trend is the inability of big retailers to pay their landlords, which are the REITs. The situation is improving but apparently their patience has run out. REITs are huge, publicly traded corporations that have to answer to Wall Street before they answer to Main Street. Even good ideas have faded and REITs need more reliable revenue sources. For example, REIT Seritage has been ahead of the curve on the trends that were supposed to lead the mall transformation. According to The Motley Fool, at the end of 2019, nine of Seritage’s top 20 tenants — accounting for nearly a quarter of its annual rent — would be considered experiential including family entertainment centers like Dave & Buster’s, as well as gyms and movie theaters as well.
But 24 Hour Fitness filed for bankruptcy in June. As a result, Seritage reported just two locations open generating $1.8 million of annual rent as of June 30, down from $6.7 million of annual rent three months earlier. As of Aug. 4, Seritage had collected just 66 percent of its rent for the second quarter and 74 percent for July.
The third trend has been the long predicted demise of the American department store. By going with Amazon and other non-retail tenants, this could be a bigger dagger than bankruptcy for department stores. When mall retailers close, “it really hurts the remaining tenants that are still there,” said analyst Nick Shields with Third Bridge. “Both from a foot traffic perspective, also from a competitive positioning perspective.” As the malls see tenants leaving, he said, “for other retailers, they’re not going to want to expand into malls where there are quite a lot of vacancies, because there’s not much there for them either.”