This is Part 2 of a two-part series on retail. Click here for Part 1: What Retailers Can Do to Eke Out Value from Their Real Estate.
Welcome to the second part of our guide on what steps retailers and owners can take – and what current and prospective investors can look for – to make it through to the other side of the current retail travails. Part 1focuses on various approaches to retaining the value of the real estate that undergirds a retailer’s stores. Here in Part 2, we’re looking at what strategies are being used in successful retail ventures.
In “An Ode to Shopping Malls,” the New York Times recently wrote that 19 malls opened in 1990 alone and at least one new U.S. shopping mall has gone up every year since the 1950s. To those who spent their childhoods or teenage years circling suburban malls, that sounds about right.
As the indoor shopping mall continues to fade from the national landscape – Credit Suisse predicted in May that as many as a quarter of U.S. malls would shut their doors by 2022 – we took a look at what kinds of strategies can help retailers not just survive in challenging times, but thrive.
Retail landlords are increasingly looking to entertainment and interactive experiences, such as laser tag and rock climbing, both to attract customers and to fill large spaces left by movie theaters or anchor stores. The amount of mall space dedicated to recreation has been on the rise since at least 2012.
In states including Massachusetts and California, mall customers can jump around at the indoor trampoline park Sky Zone, whose locations include the Westminster Mall, in the Los Angeles area, and Liberty Tree Mallin Danvers, Massachusetts, northeast of Boston.
It took a while for owners of retail properties to get used to the idea of having a trampoline park as a tenant, but whereas most Sky Zone locations were in industrial parks before 2013, now 95% of new leases are in retail areas, CEO Jeff Platt told the Chicago Tribune last year.
We’ve all heard about the dead mall phenomenon. But as a recent article about filmmaker Dan Bell’s Dead Mall Series of video shorts put it, it’s the malls located in working-class and rural communities that are “among the deadest.”
So which are among the liveliest?
Simon Property Group’s The Galleria in Houston is looking pretty vivacious, for one. This summer it opened a new $250 million, 110,000-square-foot luxury wing called Galleria VI, which is anchored by Saks Fifth Avenue and includes designer boutiques and upscale restaurants, the Houston Chronicle reported this month. The paper described The Galleria as one of Simon’s highest-performing properties, bringing in more than 30 million shoppers a year.
“There’s this whole theory that the mall is going dead, but if you walk the Galleria, you know that’s not the case,” Floris van Dijkum, a senior analyst with investment firm Boenning & Scattergood, told the Chronicle.
Indeed, global luxury retailers can expect their aggregate earnings growth to nearly double this year, Moody’s reported in May. That doesn’t mean, however, that luxury retailers have, well, the luxury of ignoring negative retail trends. The earnings growth is unlikely to hit double digits as it did in the early 2010s, Moody’s reported, adding that some luxury retailers are reducing their reliance on department stores or suspending new store openings.
Be the new city square (again)
Malls have notoriously helped decimate American downtowns, and as brick-and-mortar retail struggles to keep up with the convenience of e-commerce, some developers and landlords are looking to bring back a newer (often higher-end) version of the old downtown.
Take lower Manhattan’s Brookfield Place, a recently redeveloped waterfront office, retail and dining complex that was formerly known as the World Financial Center. The retail space includes luxury stores such as Burberry and Bottega Veneta and Bonobo. In January, Brookfield Property Partners affiliates received $550 million in financing for the 40-story office tower at 200 Liberty St. – once known as One World Financial Center and now the southernmost tower of Brookfield Place – from an investor group led by South Korea’s Kiwoom Asset Management and NongHyup Financial Group.
On the other side of the country, you’ve got California developer Rick Caruso and The Grove, a 600,000-square-foot outdoor shopping, dining and entertainment complex in Los Angeles that has a trolley connecting it to a farmer’s market. It also includes concierge services, a 14-screen movie theater, and a fountain that “dances” once an hour to songs by Frank Sinatra, Kool and the Gang and Lionel Richie. Sales across all Caruso properties grew more than 7% last year, The Real Deal reported.
Become something else
Malls and vacant big box stores have been turned into high schools, apartments, hospitals, offices and libraries, to name a few alternative options for owners of larger properties.
Take Chicago’s Merchandise Mart at 222 Merchandise Mart Plaza, a 4.2 million-square-foot former wholesale warehouse and design showroom center on the northern bank of the Chicago River. At one point, it added a retail shopping center called Shops at the Mart, but it is now home to office space occupied by technology and telecommunications businesses such as Motorola Mobility, Braintree and startup incubators 1871 and Matter. Other tenants include Fortune 500 corporations such as ConAgra and Caterpillar.
One of the world’s largest commercial buildings, the 25-story, two-block-wide complex has been renamed TheMART by its owner, New York REIT Vornado Realty Trust. The property was refinanced by Morgan Stanley, along with Bank of China and Barclays, for $675 million in September 2016.
As long as consumers keep going to a specific location to do their shopping, retail and real estate will continue to be closely linked.
As for whether retailers should aim to be entertaining, luxurious or the new city square – or whether their properties would be better off if they abandoned retail altogether – that can’t be resolved uniformly across the board. It has a lot to do with the individual retailer, its target shoppers, its market, the specific property and a slew of other factors – and that’s a question those involved in both the retail industry and commercial real estate need to examine more closely now than ever.
What Retailers Can Do To Eke Out Value From Their Real Estate