There’s arguably no more polarizing macroeconomic issue in the retail world than the fate of the American mall. On one side of the spectrum sits the “legion of doom,” or the analysts and consultants who believe the format and the department store tenants that anchor them are in their last years. On the other side are the industry professionals and retail executives who believe it is a format that will work on an experiential level – or at least on a level higher than what has been seen in this time of survival mode amid the pandemic.
As an example, check out this recent quote from Marc Metrick, CEO of Saks.
“The truth is, there wasn’t one tipping point where department stores went wrong; it happened incrementally over time,” he told Fast Company. “It was an amalgamation of numerous challenges, either ignored or wrongly addressed, that has led to the question of relevance plaguing the industry today. The problems start with how retailers view and serve the customer. The entire process, cradle to grave, has failed to evolve and innovate with the customer in mind.”
Caught in the middle of this customer squeeze are real estate investment trusts (REITs). Just as a department store needs to take care of the customer in a more relevant fashion, REITs have been struggling with how to care for their customers – the retailers themselves.
REITs are not exactly a source of good or even consistent news these days. Just this week, investors in Starwood Capital Group started to show signs of strain after the pandemic shuttered stores and wiped out emergency cash reserves, leading to default on a $700 million loan.
“The experience of the mall CMBS [commercial mortgage-backed security] from Starwood is certainly symptomatic of the larger narrative,” said Christopher Sullivan, chief investment officer of United Nations Federal Credit Union, as reported in Yahoo! Finance. “Weakening mall asset fundamentals and fewer willing investors will present ongoing financing problems.”
But apparently they’re doing something right in Philadelphia. The Philadelphia Real Estate Investment Trust (PREIT) owns 17 malls surrounding the New York-New Jersey-Pennsylvania corridor, with a smattering of properties near Detroit and Washington, DC.
While other REITs have been trying to save tenants – as the deal between Simon Property Group, Brookfield Properties and JCPenney illustrates – PREIT has been focusing on experiential retailing and attracting smaller-sized companies. For example, its newest property, the Fashion District, near downtown Philadelphia, has reopened with two new tenants: Industrious, a “luxury” coworking space, and Francesca’s, a boutique-style women’s apparel shop. Before the pandemic, the Fashion District was on its way to a stellar first year, with art installations, outdoor fitness classes and foot traffic in excess of 700,000 shoppers a month. Now, as the region comes out of the first and hopefully the only wave of the pandemic, the Fashion District is 74 percent full – and PREIT CEO Joe Coradino told PYMNTS that tenant relationships are the key to getting to the other side of the crisis.
“We have strived to stay ahead of the curve on consumer trends, particularly relating to tenanting,” Coradino said. “We are relatively lean, so we are a close-knit team that communicates well. The ability to help our tenants get to the other side of the mandated closures became front and center of our marketing efforts.
“Collaboration with our front-line leasing teams helped us key in on needs, and we began regular outreach related to operations, opening plans and programs we were developing to support them, so we could be aligned as things opened back up,” he added.
PREIT has had to absorb some of the same losses as its colleagues. Its second quarter was impacted by a decrease in revenue of $20.1 million stemming from bankruptcies and store closures, as well as an increase in credit losses for challenged tenants.
“Flexibility on everyone’s part is the key to getting through this unprecedented stage in our history,” Coradino said. “The key is to leverage our partnership as landlord to our tenants is to maximize everyone’s success. We have always viewed our tenants’ success as our barometer. We are hyper-focused on supporting our tenants.”
In terms of the future of the mall in general, Coradino admitted that he’s concerned about his small business tenants, which PREIT helps by finding and launching Shop Local pages to help bring awareness to all 17 locations. He believes the future of the mall will look very different from its current iteration. Rather than focusing only on ubiquitous national retail tenants, he sees malls as evolving toward more diverse environments, including multi-family housing, hotels, entertainment, dining, health/wellness, green space, office and co-working space, fulfillment centers, medical uses and local small business retail.
Regardless of the volume of opinions, only time will tell the future of the American mall. There are too many variables – starting with the pandemic – that need to unfold.
“Modern malls in good locations are likely to end up surviving, while older malls in less desirable locations fall away,” predicted Analyst Reuben Gregg Brewer in The Motley Fool. “But that's the simple, big-picture story. There are complex nuances when you get down to a more granular level. As the examples above show, a new mall in a good location may not be enough if there's competition for consumers from nearby shopping options. And the United States is filled with other shopping options, particularly in the most desirable regions.
“If you own mall REITs, be prepared for a long period of disruption, even as COVID-19 speeds up the retail sector shakeout,” he continued. “Good properties should become more valuable over time, but it could take a long time to get there from where we are now. You should probably stay on the sidelines if you don't have a strong enough constitution to hold on while retail landlords work through this period.”
At PREIT, it’s to their credit that they’re “working through” this period.