There are story lines that are easy to tell. A sentiment gets tossed around for so long and, after a while, people begin to believe it as a common truth — whether it’s factual or not. The story of dying shopping malls is one such narrative that’s appeared frequently, as news articles highlight some of the shopping centers going out of business following the recession. At The Cheat Sheet, we’ve written a version that highlights why some malls are struggling, suggesting it may have something to do with foot traffic or with the anchor stores located within the space.
But that narrative leaves out important factors, contends Jesse Tron, director of communications for the International Council of Shopping Centers (ICSC). The ICSC has more than 65,000 members in more than 100 countries, including shopping center owners, developers, managers, investors, retailers, and more. And based on what the council and other industry leaders are seeing, the reports of a large-spread, dying mall industry are “hyperbolic,” Tron says. In fact, industry metrics show that malls and shopping centers as a whole are performing at their highest rates since the recession, and in some cases better than pre-recession levels.
As with all consumer industries, the retail sector and malls took a hit in 2008 when the stock market plunged, unemployment rose, and uncertainty was high. Tron doesn’t deny that numbers were grim for a little while, but since that time, malls have been recovering in all areas. Sales are up, as is profitability. Mall owners and developers are savvier about what models work, and which formats will be most engaging for their customers. And the trends Tron is seeing make him optimistic not only for this period, but for the future of shopping centers, too. Let’s take a look at why that’s the case.
1. Occupancy rates are rising
Tron disputes that occupancy rates are not a problem for the industry. The council uses data from the National Council of Real Estate Investment Fiduciaries (NCREIF) to track how many retailers are buying up store spaces in malls. The occupancy rates for all retail spaces in the third quarter of 2014 was 92.8%, the highest rate seen since the second quarter of 2008. For malls alone, the occupancy rate was 94.2%, a level Tron says hasn’t been seen since the end of 1987. The rise has been a gradual increase, Tron says, and has come about from a number of factors.
For one, stores are becoming more flexible in how they use spaces available to them, and are more willing to match the size of the store with the size of a market. Stores in huge metropolitan areas such as New York City might have more square footage than stores in rural areas, for example. In the smaller markets, there’s been a shift. National chains don’t feel the need to buy up square footage if a smaller footprint will be more efficient, Tron says. Plus, the recession forced mall owners and developers to become better educated about what would appeal to their particular audience.
What’s more, base rent prices are rising. Over 2014 the base rent prices spiked an average of 21.3%, the largest gain since the industry began tracking the measure in 2000. “Demand is far outpacing supply in the industry,” Tron says. “We’re in what would be called a ‘landlord’s market.'” As stores themselves have begun to rebound and look for areas in which to expand, the race to find available space has gotten tighter. Not only does this benefit rent payments, but it helps mall owners’ overall efficiency, Tron says.
2. Attention to efficiency has grown
One of the biggest lessons learned during the recession, Tron says, was that measures of efficiency trump many others. The mall industry doesn’t look at foot traffic as an accurate measurement of profitability. (See more on that later.) Instead, owners and industry leaders began using Net Operating Income (NOI) more consistently. The figures are derived from taking all operating expenses, such as the utility costs, taxes, and staff wages, and matching them up against income from sales. The net figure is the profitability, and is a figure that’s growing on a national scale, Tron said. NOI for super-regional and regional malls increased by 17.5% in the fourth quarter of 2014, which Tron says is the fifth consecutive quarter of double-digit gains.
A result of following NOI more closely is that owners and developers are taking a more thorough look at their existing properties before deciding to build new ones. There are still new malls going up, but the emphasis in this economic climate has been to renovate and ensure the existing properties are aesthetically pleasing, have updated technology, and are the best use of secured funds. “Again, it’s a lesson learned,” Tron says, adding that developers are much more careful since the recession to make sure they’re not overextending their market by added too many new buildings.
3. The size of the market is a factor
Many analysts use the term “A” malls or “C” malls to describe shopping centers, often based on sales per square foot and other data. It’s not an industry term, Tron says, and he doesn’t use it. But what analysts are actually describing is primary, secondary, and tertiary markets. An “A” mall might be making $800 per square foot, but that’s often because it’s in a primary, larger market, and typically attracts the high-end retailers that make it easy to reach those kind of numbers.
What’s deceiving about the letter grades is that it’s assumed that making less money per square foot is automatically a bad thing, Tron says. “Just because they’re making $350 per square foot doesn’t mean they’re not incredibly profitable,” he explains. If that’s happening in a tertiary market where the audience is smaller, it’s likely that figure could still be a viable business. In smaller markets, rent costs and other expenses are often lower, meaning overhead isn’t as high as a mall in a primary market would pay. Just as in any industry, malls still need to make a profit at every level of income and audience size, Tron says. That’s why when the general narrative of “all malls are dead” changed to “all ‘C’ malls are dead,” it was still inaccurate, according to Tron. “There are more than just the top 50 or so properties that are going to be just fine,” he says.
4. The shopping experience is changing, and that’s ok
As with any industry, shopping malls aren’t immune to changes in consumer behavior or trends. A big part of the shopping experience has changed because of the influx of technology. That’s not a bad thing, Tron said, especially as mall owners take active steps to ensure the preferences of consumers are taken into account. Foot traffic is down in malls across the country, but Tron contends that’s because shoppers, with technology at their fingertips, have become more efficient. It’s a phenomenon Tron calls “webrooming,” and basically means that people narrow down their choices of what they’d like to buy on the Internet before going to the correct store and purchasing it. What used to take three trips to pick out a new computer — price checking, comparing models, getting tips for which one would be best — can now happen completely online.
Still, less than 10% of actual sales happen online. (Plus, The New York Times reports, a large percentage of that portion affects big box retailers, not necessarily shopping malls or the stores in them.) People still need a touch point, or a physical place to go, in order to buy the item. Sometimes it means trying on the clothes, and other times it means testing out the technology in person to make sure you like how it works.
The Internet is also why traditional anchor stores don’t mean as much anymore, Tron said. Anchor stores in the “good old days” were meant to draw people in and then help them discover smaller retailers. Now, people can go online and see every store their mall has ahead of time. This means that any store can serve as that “anchor” for people at any given time — it can change every day. It’s these trends, and the general nature of people that makes Tron believe malls not only have a future, but a strong one.
“There’s inherently a social aspect to shopping,” Tron said, who noted that his relatives don’t crowd around a computer screen to order clothing, but they do meet at the mall. That experience is perhaps becoming more streamlined as people search for what they want ahead of time, but it’s still happening. Plus, mall owners are willing to ensure that their buildings adapt to the changing needs of people. Above all else, that’s the most promising factor Tron sees. “I think that this is an industry that is showing its willingness to evolve,” he said. If a mall can put its customers first, adapt to shopping trends, and create an experience customers enjoy, Tron says they’ve got a good shot at making it in the long run.
Follow Nikelle on Twitter @Nikelle_CS