Tuesday, March 26, 2019

How Bad is the Mall Business These Days?

It will be two years in May since Credit Suisse came out with its bold prediction that up to 25% of regional enclosed malls would close by 2022. At the time, there were roughly 1,100 malls in the U.S., which translates to approximately 275 mall closings. Many skeptics rejected the idea, saying it would never reach that level, and that the dire calculation was way overblown. 

We’re not even halfway to that 2022 end date, yet it’s starting to feel as if that forecast by Credit Suisse may not be so unreasonable. After all, the ongoing brick-and-mortar fallout experienced at regional malls is showing no sign of abatement.

The retail industry has seen more than its fair share of bankruptcies over the past two years, and no sector has been hit harder than malls. According to lists compiled by Retail Dive, there were 21 bankruptcies in 2017, 13 in 2018, and there have been 10 bankruptcies so far in 2019 – and we’re not even through the first quarter yet. Among these 44 bankruptcies, 29 have been filed by major mall-based retailers (this doesn’t necessarily reflect all mall-based stores, as some retailers opt for both mall and off-mall locations). Once-formidable chains such as The Limited, Gymboree, and Brookstone are now out of business.

And, of course, malls have been dealing with hundreds of department store closings. While Sears is the most notable among the group, Macy’s, JCPenney, Bon-Ton and others are included as well.  A recent list compiled by Moneywise indicates that in 2019 Sears will close another 72 stores, JCPenney will close 27 units, Macy’s another eight stores, and Lord & Taylor will close eight stores. On the heels of the Sears and Bon-Ton bankruptcies in 2018, Moody’s Investors Service placed JCPenney and Neiman Marcus on its short list of those most likely to go into default or possibly bankruptcy later this year - both are swimming in debt and may need to file for Chapter 11 protection.

During the same time frame, in addition to bankruptcies, plenty of still-viable mall-based retailers announced store closings in droves. These include the Ascena Retail Group (Ann Taylor, Loft, Dress Barn), Gap, Abercrombie & Fitch, J.Crew, The Children’s Place, Foot Locker, Michael Kors, American Eagle, BCBG, Charming Charlie, Best Buy Mobile, and many others.

According to Coresight, store closings actually fell in 2018 - 5,524 stores were shuttered compared to 8,139 the previous year. Through the first six weeks of this year, prior to the Payless ShoeSource liquidation, Coresight said 2,187 stores have already been closed, up 23% in the same time frame last year.

Among the 10 bankruptcies already announced in 2019, mall-based retailers include Charlotte Russe, Things Remembered, and Payless ShoeSource, the latter announcing the closing of all 2,500 stores in what could be the largest liquidation in retail history. The latest bankruptcy, filed just this week, was Diesel USA.

We’ve all heard about the classification of malls into “A, B, and C” categories. With all that has gone on in the past few years, it would be naive to say that A malls have gone unscathed. But it also wouldn’t be unreasonable to say that A malls are in the best position to recover. Better quality anchors, better quality tenant mix, and better demographics all contribute to the long-term viability of these regional shopping centers.

At the other end of the spectrum are C malls, those with high vacancy and continuous erosion of market share. If there’s a solution to the problems facing this classification of malls, it typically results in the repurposing of the property to some non-retail use. And then we have the “tweeners” in the B classification. At these properties, perhaps demographics are favorable for retail but the tenant mix is wrong, or an anchor vacancy or two has considerably impacted foot traffic. Sometimes these properties just need a face lift in the form of a new non-traditional anchor to spark some new life.

 In the Boston market, we can point to the Burlington Mall, for example, as an A-level mall that has proactively taken an empty Sears store and is currently remerchandising the space into much higher rent- paying shops and restaurants. The Silver City Galleria undeniably represents the C classification. All three department store anchors have closed as well as Best Buy. Overall this center is more than half empty. At one time there was hope of repurposing the property into a casino, but that potential opportunity ship has since sailed.

University Mall in South Burlington, Vermont (a mall we manage and lease) typifies the B classification. KeyPoint Partners’ leasing team was able to replace a vacant Bon-Ton store with the first Target store in the state pictured above). As a result of the pent-up demand for this dominant discounter and subsequent increase in customer traffic, H&M also was enticed to locate its first Vermont store at University Mall. With the ability to lease to these two additions, as well as relocations and expansions of other key tenants, there’s significant upside potential to attract more viable tenants to UMall.


While some malls are at the point of no return, there is hope for some – the question is ultimately how many. We’ll keep one eye on the count and another eye on the Credit Suisse prediction.

The bottom line is? As is so often the case in the current retail environment, things ain’t easy.

Bob Sheehan, VP of Research,
BSheehan@KeyPointPartners.com

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