Could The COVID-19 Pandemic Spell The End For America’s Malls?

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The rise of online shopping in the past several years has left many malls throughout the US fighting for their survival. Across the country, shopping centers that were once bustling with activity are now either mostly empty or have been completely abandoned altogether.

Metrocenter, which at one point was the largest mall in Arizona, announced in June of 2020 that it would be shutting down by the end of the month, after 47 years in operation. A month prior, Northgate Mall in Durham, North Carolina, which first opened in 1960, announced that it would be closing for good.

Some malls, meanwhile, have fared better by shifting their focus towards experiential offerings, from leisure activities to fitness centers and other personal care services such as salons and spas. However, with many of these businesses either closed or not operating at full capacity due to the COVID-19 pandemic, the future of these malls now hangs in the balance.

According to a team of analysts at the New York-based global research firm Coresight Research, anywhere between 25 to 50 percent of malls in the US could disappear within the next three to five years, with lower-end “B” and “C” malls more likely to permanently close than high-end “A” malls. This is largely due to lower-priced stores having lower profit margins than luxury brands.

Kevin Cody, a senior consultant at CoStar Market Analytics, said that nearly 500 of the more than 1,700 malls in the US are currently at risk due to their “poor” locations and the fact that they depend so much on tourists and office workers for foot traffic. With the pandemic not showing signs of slowing down anytime soon, mall operators will have to get creative to stay afloat.

Adding to mall operators’ woes is the fact that many of the department stores and apparel retailers that dominate most malls have been struggling in recent years. Brands such as J.C. Penney, Neiman Marcus, Brooks Brothers, and J. Crew have filed for Chapter 11 bankruptcy throughout the pandemic, with at least 242 store closures planned by J.C. Penney alone. According to CoStar, retailers throughout the country have closed over 80 million square feet of retail space as of July of 2020, already nearing the 114 million square feet closed in all of 2019.

The challenges faced by department stores are especially problematic for malls since many have what is known as a co-tenancy clause. This allows smaller, non-anchor tenants like Gap or Abercrombie & Fitch to leave when large anchor tenants move out. With enough vacancies and no new tenants to occupy these spaces, a mall could be forced to close permanently.

Before the pandemic, one strategy often used to revitalize malls was to increase the number of experiential and activity-based tenants. In light of recent events, some mall operators are now left wondering whether the experiential model is still worth pursuing.

Michael Brown, a partner at the global strategy and management consultancy firm Kearney, believes that the experiential model remains compelling in the long run. According to Brown, the pandemic is only temporary, and people will once again gather in public and enjoy dining, sports, entertainment, and other forms of recreation together. He believes the strong will survive, but they will likely take a short-term hit to their finances.

CoStar consultant Robin Trantham said that while it may take a while for restaurants and fitness centers to grow at the same rate as they did pre-COVID, he believes they will eventually recover. He also said malls are still likely to continue moving towards experiential retail because of the pressure e-commerce continues to place on physical stores.

Nick Shields, a consumer sector analyst at Third Bridge Group Limited, said malls are “going to be weakened” coming out of the pandemic, even in a best-case scenario. However, he believes outdoor malls are in the best position to make it through.

In the long run, some malls might have to once again rethink their strategies. Some analysts have suggested savvy mall owners will look into turning their space into apartments, hotels, or online product fulfillment centers. However, these aren’t likely to eventuate anytime soon as mall owners are still too busy dealing with the concerns of the present.

Many mall operators are now under pressure to provide rent relief for their tenants. Some companies, such as The Cheesecake Factory and Nordstrom, have either failed to pay their rent in full or are negotiating temporary reductions. Without rent relief, more stores could close, which would put even more financial pressure on mall owners.

As an alternative to rental relief, some mall owners are considering buying out retail brands, as is the case of the attempt by Simon Property Group and Brookfield Property Partners to acquire J.C. Penney through a joint bid, first reported in June of 2020. However, some experts have spoken out against this idea, saying that mall owners don’t have the right experience to successfully run retail brands.

In any case, mall operators will need to work closely with their tenants and local officials to figure out how to survive this pandemic. Lawsuits against tenants for failing to pay rent could lead to a downward spiral for both parties, so they must be avoided whenever possible.