The death of the enclosed regional mall has been predicted for years. Back before the turn of the century, in 1998, a Time magazine cover declared “Kiss Your Mall Goodbye.” In the mid-2000s, a Retail Traffic magazine headline proclaimed “The Mall Is Dead.” An entire cottage industry devoted to dead malls emerged in real estate.
How ironic, then, that today the regional mall is not just surviving but thriving compared with its shopping center competitors. Mall sales per square foot have increased this year to their highest level since 2007. Mall real estate investment trust (REIT) returns have outperformed shopping centers and freestanding retail centers. And vacancy rates remain lower at malls than at strip centers.
“Malls have [become] the powerhouse of the retail landscape again,” says Rich Moore, managing director of REIT research with RBC Capital Markets.
The comeback of the mall is being driven by a variety of factors. Malls have benefited from the post-recession improvement in luxury retailing, from clothiers such as Burberry and Louis Vuitton to jewelers such as Tiffany and Cartier. Malls have benefited, too, from a rebound in tourism in some metropolitan areas. In addition, many malls exhibit strong real estate fundamentals, ranging from locations featuring good demographics and access, to the property sector’s lack of overbuilding, as no new enclosed mall has opened since 2006, according to the International Council of Shopping Centers (ICSC).
“I know a lot of people have been worried about malls, but they’re still the cornerstones of their retail communities,” says the ICSC’s Jesse Tron.
Meanwhile, large mall owners have been actively investing in their properties in recent years, adding new attractions as well as luring new major tenants. Malls have been signing nontraditional tenants, such as big-box stores, that used to prefer power or lifestyle centers instead of malls. Regional-mall REITs such as CBL & Associates and Taubman Centers have been adding stores like Dick’s Sporting Goods and H&M, as many retailers have sought out safer havens in stronger properties.
Moreover, malls have been upgrading and adding amenities, from revamping food courts to creating destination attractions. Some of the recent popular additions to malls include movie theaters, mini-golf courses, gyms, and medical offices. Simon Property Group, the Indianapolis, Indiana–based REIT with the largest portfolio of regional malls in the country, is going further and putting in aquariums in its properties in the Dallas and Phoenix metro areas, a Legoland Discovery Center in metro Atlanta, and even a casino in Baltimore.
“It’s a matter of continuing to make the mall a place where people want to go and be,” says Gar Herring, assistant chairman of ULI’s Commercial & Retail Development Council (Blue Flight) and president of the MGHerring Group, a Dallas-based shopping center developer that recently purchased a suburban-Dallas mall with the intention of building a new food court as part of the renovation plans.
So, in an ironic twist, some of the very issues that caused various observers to write off malls—that they were indoor environments, relied on multiple anchors, and catered to all consumers—are now becoming assets again. The proof has been in the performance.
Overall, mall sales per square foot have been on a two-year growth trend and surpassed the $400 mark this year for the first time since 2008, according to the ICSC. Top-tier properties have done even better. For the second quarter of 2011, sales per square foot rose 14 percent at Taubman’s malls and 9 percent at Simon’s malls.
“The trend lines are good,” Simon spokesman Les Morris says. And Robert Taubman, chief executive officer of Taubman Centers, told stock analysts in July that the “ongoing momentum in our core demonstrates the strength of the high-quality regional mall.”
Indeed, regional-mall REITs have, as a group, outperformed all other REIT categories this year except for the residential property sector, according to the National Association of Real Estate Investment Trusts (NAREIT). Even after the stock market’s summer swoon, regional mall REITs had returned 1 percent through September, compared with -10 percent for shopping centers and -6 percent for REITs overall.
“Mall REITs have been doing quite well,” says Brad Case, NAREIT’s senior vice president for research.
Finally, the spread between mall and strip-center vacancy rates has widened since the mid-2000s. The average mall vacancy rate of 9.4 percent remains well below that of the overbuilt neighborhood shopping center sector, which is at 11 percent, according to third-quarter figures from real estate research firm Reis Inc.
Certainly, challenges remain for the mall’s continued comeback. The vacancy rate has been rising, and actually is at its highest level since at least 2000, in part because of unrelenting retail bankruptcies. A segment of malls—some analysts estimate 10 percent—are in danger of failing. Plus, the internet keeps slowly eating away at in-store shopping. Yet, no one is predicting the death of the mall anymore. A Retail Traffic headline this year even announced “The Return of the Mall.”
“Malls are generally well positioned, with limited supply and strong demand for high-quality space,” says Nate Isbee, a vice president and retail REIT analyst with Stifel Nicolaus. “The long-term outlook of regional malls is very strong.”
