Wednesday, May 21, 2014

Regional Malls: Days of Future Past?

In a 1991 report to shopping mall owners, Management Horizons, the retail consulting division of Price Waterhouse at the time, said that regional shopping centers' share of non-auto retail sales grew from 10% to 17% between 1974 and 1982, but had slipped to below 15% by 1990. At the same time, new mall space was booming. In the mid-1970s there were 800 centers classified as “regional malls” - those with more than 400,000 square feet of space. By the mid-1980s there were 1,800 malls of that size, a growth of at least 400 million square feet of shopping space.

"You had this enormous increase in space without a corresponding increase in consumer demand," said Carl Steidtmann of Management Horizons. "There was an explosion in all types of retail space, but we felt the mall space was most overbuilt and the most vulnerable to the changes in shopping."

And there you have the beginning of the “Demalling of America.” The heyday of mall development was over. That’s why we’re still talking about “B” and “C” malls today, and the conversion of some of them to non-retail uses.

Just this month, an article in Yahoo! Finance examined how those B and C malls suffer when long-time major tenants such as Sears and JCPenney race to close stores. Nearly half of the 1,050 indoor and open-air malls in the U.S. have both of those struggling chains as anchor tenants, according to real-estate research firm Green Street Advisors. Every closing of one of these anchors results in a loss of foot traffic and inevitably a loss of smaller mall shops. Green Street Advisors notes that one-quarter of Sears and JCPenney-anchored malls have mall shop sales productivity of less than $300 per square foot, an established benchmark in determining the long-term viability of malls.

In an article from this month’s Shopping Centers Today, mixed-use development designer Yaromir Steiner makes some insightful comments regarding A, B, and C malls. He describes A-level properties as “want-based” centers that include experiential and aspirational tenants. He goes on to define B and C malls as “need-based” centers with little to no upside potential. Based on regional accessibility and demographic profile, Steiner thinks that only 25% of the several hundred B and C malls that remain in the U.S. offer redevelopment opportunities to bring them back to A-level standards.

In Eastern Massachusetts, Natick Mall, anchored by Nordstrom, Neiman-Marcus, and Macy’s, and complemented by a cache of high-end retailers, is a good example of a want-based center. Tenants such as Apple, Louis Vuitton, Tiffany, Bose, Anthropology, Madewell, Lego, and American Girl all offer compelling reasons for even the discerning shopper to simply walk in and explore, even without a specific need in mind. Other malls in the area that fit this profile include Burlington Mall in Burlington, Northshore Mall in Peabody, and South Shore Plaza in Braintree, all of which have undergone major remerchandising in recent years which included the addition of a Nordstom department store. Not only is the merchandising at these shopping centers now second to none in suburban Boston, but their regional accessibility to some of the most affluent sectors of the metropolitan area is excellent.

On the other hand, the metro-Boston area has its share of need-based B and C malls as well. Three Eastern Massachusetts malls that fit this profile are Silver City Galleria in Taunton, Independence Mall in Kingston, and Swansea Mall in Swansea. Although Boston is considered one of the more affluent, sophisticated retail markets in the country, whose regional malls generally outperform other regions of the country, these three Southeastern Massachusetts malls largely serve moderate to lower income communities and consequently lack the ability to attract a compelling, higher-end, want-based retail mix. These conditions put marginal malls like these on a slippery slope toward bankruptcy and disposition, and all three are facing their share of adversity. Silver City Galleria has been through bankruptcy and subsequently has been sold twice. Swansea Mall, which is sitting with a vacant department store and has suffered from the relocation of Walmart to an outside pad, is currently for sale. Independence Mall, like the others, suffers from relatively low occupancy rates resulting from the loss of key tenants. Furthermore, their regional accessibility does not allow for effective penetration of affluent communities, and all are substantially constrained by more potent retail concentrations.

Two of these malls, Independence and Silver City, were built in 1988 and 1992, at the tail end of mall development in the region. Since that time all malls everywhere have been adversely impacted by what’s happened around them, with big box stores, value-oriented retailers, and lifestyle/hybrid shopping centers (to say nothing of shifting customer demographics and the onslaught of ecommerce) all contributing to the erosion of their market share.

High quality, aspirational, want-based centers such as Natick Mall, Northshore Mall, South Shore Plaza, and Burlington Mall are better positioned to absorb those impacts. The old saying about “location, location, location” has never been more true. These A-level products put their stakes in the ground in the 1950s and 60s, during the era of the birth the regional mall, and have evolved from their original formats to what they are today. One could say they’re not getting older, they’re getting better.

The same can’t necessarily be said of smaller, need-based B and C malls. As the overall retail industry continues to change at a more and more rapid pace, as the Sears and Penney closures proceed and likely accelerate, and as we await the next major-tenant-multiple-store-closing shoe to drop, the fate of even that small percentage of marginal malls that have a chance at redevelopment remains very much to be seen.

Bob Sheehan, Vice President of Research
BSheehan@KeyPointPartners.com

Company News

New Business:  Big Lots has signed a lease for 31,002 s/f of space at Wonderland Marketplace in Revere, MA. VP of Leasing Don Mace negotiated the deal. New Management and Leasing assignments: Walnut Hill Plaza, a 298,000 s/f retail center in Woonsocket, RI and Summit Square, a 133,900 s/f retail center in Warwick, RI. Don Mace is handling leasing for both centers. Employee News:  Yabatget Fantahun joined the Boston Office as an Assistant Parking Manager. Yabatget has extensive parking management experience, most recently at SP Company (Standard Parking, Central Parking and USA Parking). Chris Serrano will become a Property Manager in the Burlington, MA office. Chris has been a Property Accountant  at KPP for five years.

National Retail News

April comparable-store sales posted a year-over-year gain of 6.2% based on the ICSC’s final tally of 11 retail chains, boosted by the later Easter sales in 2014 versus 2013. The April performance was the strongest monthly rise since June 2011 (+6.9%) and the strongest April gain since 2011 (+8.5%). L Brands (Limited) was up 8.0%, Gap was up 9.0%, Rite Aid was up 5.0%, Walgreen’s rose 8.2%, and Costco gained 5.0%. See our sales report below.

Accelerating Retail News

Ann Inc., parent of Ann Taylor, Loft and Lou & Grey, opened the first freestanding Lou & Grey store, in Westport, CT. The 1,200-square-foot space was carved out of an existing Loft store; future units are planned at 2,000 - 3,000 sf. 4 additional freestanding Lou & Grey shops will open this year, though no locations have been announced...Express opened its first-ever outlet store, at Tanger Outlets National Harbor center in Washington, D.C. The retailer plans to open approximately 30 additional US outlet locations in Chicago, Dallas, Detroit, Las Vegas, New York and other markets...Pep Boys plans to open 30 Service & Tire Centers during fiscal 2014, predominantly in San Francisco, Boston and Charlotte, NC. The chain also expects to add more Speed Shops store-within-a-store operations to existing outlets and convert more locations to the “Road Ahead” modular design. Pep Boys operates 800 locations in 35 states...Starbucks will open 1,500 new stores worldwide during 2014, including 600 in North America...Hurricane Grill & Wings has signed five multi-unit development agreements, representing 22 new locations slated to open in 2014-2015...Forever 21 will debut a new store concept called F21 Red this month when it opens an 18,000 s/f store in South Gate, CA. The concept will offer a larger selection of starting price points. Forever 21 has more than 600 US stores...GameStop will close 120-130 of its 6,457 stores worldwide in 2014 and add 300 to 400 new tech stores under three different banners: Spring Mobile, Cricket and Simply Mac. The closures and openings are part of the company’s repositioning, which emphasizes mobile-gaming. In the current fiscal year, GameStop expects to open 200 - 250 Spring Mobile stores, 20-25 Simply Mac stores, and 100 - 150 Cricket stores...Tile Shop will open 20 new stores during fiscal 2014...Lumber Liquidators will open 35 to 40 new store locations in its expanded showroom format and remodel 25 to 30 existing stores in that format...Sony Electronics will start opening “Sony Experience at Best Buy” shops at approximately 350 Best Buy locations nationwide this month. The dedicated shops will showcase a comprehensive selection of Sony's TV line-up...Ascena Retail Group opened new Lane Bryant stores this month in Woodhaven, MI and Peabody, MA. In April, the company opened 4 new Lane Bryant stores, and 3 in March. The company operates over 775 full-line US stores...Leslie’s Poolmart will open three locations this month, and 45 new stores this year, bringing its total store count to more than 850 stores nationwide... Dick’s Sporting Goods opened a new Field & Stream store in Erie, PA. At its annual Analyst Day meet held late last September, Dick’s plans to increase its store count to 800 by the end of fiscal 2017. At the end of fiscal 2013, the company was operating 558 stores...Barnes & Noble Inc. plans to open about 300 new stores on college and university campuses in the next five years, and expand its college bookstore footprint from the current 696 locations to 1,000. The retailer also plans to bring its count of 30,000 s/f academic superstores from 35 to 75...Nordstrom Inc. plans to open three full-line stores and 17 Nordstrom Rack stores during the remainder of fiscal 2014. Nordstrom ended the quarter with 117 full line stores, the same as the prior year, while the number of Rack outlets increased to 150 from 128...Subway plans to open about 3,000 new locations worldwide this year. Subway currently has more than 41,000 stores in 105 countries worldwide.

Decelerating Retail News

Rent-A-Center Inc. will close 150 US stores. Customer accounts from the closed stores will be consolidated to nearby locations. The company operates 2,997 US stores...Wet Seal Inc. will begin winding down its Arden B brand, which currently operates 54 mall-based stores and an e-commerce website. 31 Arden B locations will transition to Wet Seal Plus and the remaining 23 locations will transition from Arden B to Wet Seal. The company will close 15 Arden B locations through the remainder of fiscal 2014 and 16 locations in fiscal 2015....Aeropostale Inc. will close 125 of its mall-based P.S. from Aeropostale stores by the end of its current fiscal year...Office Depot Inc. will close at least 400 US stores to reduce overlap with OfficeMax, which it acquired last year, and better compete with e-retailers, mass market chains and drugstores. By the end of March the company had 1,900 US stores. That's expected to drop to 1,500 by 2016. OfficeMax merged with Office Depot in November...Gordon Brothers Group and Hilco Merchant Resources have launched the total liquidation of all 365 US Coldwater Creek stores and its website. Coldwater Creek filed a Chapter 11 voluntary reorganization petition last month. The closures deliver about 2.2 million s/f of space back to the market...Darden Restaurants says it entered an agreement to sell its Red Lobster chain to investment firm Golden Gate Capital in a $2.1 billion cash deal.

New England Retail News

Zinga! Frozen Yogurt opened in Seabrook, NH, joining other Zinga! stores in Saugus, Reading, North Andover and Peabody...Primark, one of the largest clothing retailers in Europe, plans to open a flagship store in 112,000 s/f of space on four floors of the former Filene’s in Boston's Downtown Crossing...Wegmans opened a 70,000 s/f store in Chestnut Hill, MA last month...The Staples at 943 South Main St., Cheshire, CT will close by July 5 as part of a nationwide shutdown of 225 stores, just months after the retailer closed its North Haven location...Hamilton Hardware closed last month, after 92 years in Dorchester’s Bowdoin-Geneva neighborhood...Bob’s Discount Furniture will open its eighth New Jersey store in Freehold next month. With the opening the Manchester, CT-based company will have 51 stores in 11 East Coast and Mid-Atlantic states....The Omni Supermarket in Weston is closing after 25 years in the town center...The owner of Back Bay bar Daisy Buchanan’s sold the property at 240A Newbury Street, and the bar will close. The properties’ new owner plans to renovate and possibly expand the retail spaces...Noodles & Company opened its first Massachusetts store at White City Shopping Center, Shrewsbury...Target is opening a 135,000 square feet store at the University Station development in Westwood in March, 2015. The retailer has 25 stores in the Boston area...G.P.B. Holdings LLC, an entity managed by Boston venture capital firm the Bollard Group, has sold a 1.4 million s/f retail portfolio in Greater Boston, New Jersey and Connecticut to Kimco Realty Corp. for $270 million which includes the assumption of $120.5 million of debt. Kimco owns interests in 852 shopping centers comprising 125 million square feet of space in 42 states, Puerto Rico, Canada, Mexico and South America. The portfolio includes 21 MA retail centers...Big Y Foods will acquire the assets of Everybody’s Market in Cheshire, CT. The 33,200 s/f store will close for a week to clean, upgrade and refurbish equipment, and restock with fresh food and Big Y’s own-label products...Uniqlo will open six Boston area locations through Spring 2015, starting with a pop-up location this summer in Faneuil Hall Marketplace. Uniqlo will launch locations at the Natick Mall, The Mall at Chestnut Hill, Northshore Mall, Legacy Place, Newbury Street and a permanent Quincy Market location in Spring 2015. Uniqlo currently has more than 1,300 locations worldwide...Runner’s Alley opened its fourth store in Concord, New Hampshire...14 outlet shops opened this month in the first phase of the new Assembly Row project in Somerville, MA. When completed, the complex will include 2,100 residences, 1.75 million s/f of office space, and 500,000 s/f of retail and restaurants...Whole Foods Market opened its 28,000 s/f Hyannis, MA location, in Southwind Plaza on Route 132...A Microsoft Store opened this month at the Maine Mall in South Portland, part of a strategy to open retail outlets as close as possible to Apple Stores. The two stores at the Maine Mall are about 75 yards apart. Since 2009, Microsoft has opened 87 stores in the US, Canada and Puerto Rico. By the end of this month, there will be 93 stores. Apple has 254 US stores.

April Retail Sales Report

























Notes: figures gathered from individual company websites, press releases, and Federal filings.  Not all companies report all figures; results not reported will be marked “n/r”. Quarterly results will be updated when available; quarterly figures are shown in italics. Figures from companies not calculated to one decimal point automatically received an ending digit of 0. 

Commerce Department Monthly Sales

The Commerce Department said that seasonally adjusted retail sales rose just 0.1% last month, after surging 1.5 % in March. April figures might have been depressed because of seasonal adjustments connected to a later than usual Easter. Excluding autos and gasoline, retail sales fell 0.1% last month.

Source: U.S. Department of Commerce - commerce.gov

Treasury Yields


















Treasury Yield Sources:  federalreserve.gov; ustreas.gov

Consumer Confidence Index

The Conference Board Consumer Confidence Index®, which had increased in March, declined slightly in April. The Index now stands at 82.3 (1985=100), down from 83.9 in March. The Present Situation Index decreased to 78.3 from 82.5, while the Expectations Index was virtually unchanged at 84.9 versus 84.8 in March.

Source: The Conference Board - www.conference-board.org

Purchasing Managers Index

Manufacturing expanded in April as the PMI® registered 54.9 percent, an increase of 1.2 percentage points when compared to March's reading of 53.7 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business - www.ism.ws