Rich Mall, Poor Mall: Darwin Comes to Retail Meccas

Art by Jonathon Rosen

Shopping malls once were a shiny asset class with a strong appeal for everyone from avid consumers to idle teenagers. That allure has faded, with scores of these retail destinations shuttered in recent years, thanks in part to ecommerce.

But this sector is hardly going away, just “right-sizing,” as the saying goes. The survivors are at “the higher end,” says Chris Shipley, chief investment strategist at Northern Trust Asset Management. They tend to be located in wealthier areas, and feature more chi-chi stores than the rest of the group.

In 2017, there were 1,600 malls in the U.S, according to Statista. Now, that number is closer to 1,000, with more losses on the way. Shipley expects about 20% of them will go under in coming years. This reverses an explosion of malls that began with the very first one in 1956, Southdale Center, in Edina, Minnesota.

Caisse de Depot et Placement du Quebec, which has been an avid investor in mall properties, is whittling down its holdings in them, in favor of more promising real estate in industrial, health care and housing, with an emphasis on Asia. Malls have had a similar trajectory in Canada to that in the U.S.: up, then down. Earlier this year, CDPQ’s real estate arm sold its Tsawwassen Mills mall, a Vancouver area shopping center, to a Chinese company. In 2020, CDPQ—Canada’s second-largest pension plan—announced it would sell a third of its malls.

As of year-end 2021, retail venues made up 13.5% of CDPQ’s real estate portfolio earnings, which was about 10% of the Canadian fund’s total assets. Real estate logged a 10.2% return for 2022’s first half, a bright spot for the program, which overall lost 7.9% due mostly to downturns in the equity and bond markets. The dogs in the real estate division were the lagging performances in shopping centers and offices, another troubled segment.

Urban shopping centers have “had a harder time than the suburban centers during the pandemic,” said Julie Bourgon, head of retail, Canada at CDPQ, in a statement. Stressing that retail remains “relevant and key” to the organization, she expressed optimism that the urban situation would improve as workers returned to downtown.
She added that “our focus for this asset class is now on the optimization/development of strategic centers.”

Shopping Shangri-las …

The winners in this Darwinian competition are not exactly investment bonanzas, given anemic consumer spending lately, courtesy of higher inflation. But the top-drawer shopping centers are holding their own on the profit front.

Take Simon Property Group, half of whose holdings are in Class A malls, the top of the retail hill. Its largest holding—it has 100 in the U.S.—is King of Prussia Mall, serving the tony clientele of Philadelphia’s Main Line. In the year’s first half, Simon’s retail outlets had 94% occupancy, up two percentage points from 12 months before. Simon’s net operating income advanced 4.6%. The stock, though, has slipped 45% this year, in keeping with the rancid market performance of the retail sector. Simon could not be reached for comment.

“The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere,” wrote Morningstar analyst Kevin Brown in a report. So “as a result, we think Simon’s portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.”

Foot traffic is down at all malls, compared with pre-pandemic 2019, but less so at Class A locales. Compare the drop over the past three years at Class A properties (off 7%) to that of Class B (8%) and Class C (13%), per real estate research firm Green Street. While there aren’t exact criteria for these classifications, generally Class A centers are in the wealthiest areas, are relatively new, charge the highest rents and book the best profits.

The U.S.’s most profitable Class A malls have capitalization rates (net operating income divided by property market value) north of 5%. They belong to Simon’s rivals—Macerich, with Scottsdale Fashion Square in Arizona at a 5.1% cap rate and Queens Center in New York at 6.0%, and France’s Unibail-Rodamco-owned Westfield Valley Fair in California at 5.1%, Green Street data show.

… And the Woebegone Ones

Hundreds of empty malls litter the American landscape. Most are down-market venues that couldn’t survive the public’s gradual cooling of its enthusiasm for malls, a sentiment change that has been under way for at least the past decade and accelerated with the pandemic.

The biggest disaster is the American Dream Mall, in East Rutherford, New Jersey, just outside New York City. Part of the problem was the timing: It opened right before the onset of COVID-19. Another liability was the complex’s enormous cost, $6 billion. Closed for six months in 2020, it has slowly lured back visitors, but owner Triple Five Group has missed some debt payments. Triple Five couldn’t be reached.

Other less-ambitious centers have floundered after their long runs back in the hey-day of malls. Killer Urbex, a research site dedicated to abandoned buildings, cites two that began in the 1970s, underwent expensive renovations to stay current and nonetheless lost business to newer competitors.

ShoppingTown Mall, in Dewitt in, upstate New York, was originally a smaller center founded in the 1950s and got upgraded to a full-blown mall in 1976, eventually adding a food court and attracting anchor tenants Woolworth and JCPenney. Those anchors suffered as consumers’ affection for mid-level department stories waned. ShoppingTown fell into bankruptcy and ended up evicting its remaining tenants when it closed for good in September 2020.

Cortana Mall, in Baton Rouge, Louisiana, also opened in 1976, with Sears and JCPenney as anchors. With its three-screen cineplex, it was for a time the largest mall in the South. The same headwinds prevailed. Despite a costly renovation, it suffered at the hands of a newer mall nearby. It closed in 2019.

NTAM’s Shipley notes that the survivors are repurposing themselves to include more entertainment and by functioning as pick-up hubs for merchandise ordered online. And, he says, they will retain their traditional function as magnets for browsers, for whom Web photographs won’t do.” Clothing and shoes have not been big for Amazon,” he notes.

In days of yore, malls were happy places where people liked to go. Maybe that yen didn’t disappear entirely.

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