The Acceleration of Shopping Center Destruction

Pundits and forecasters in the retail industry have been predicting the demise of the regional mall since the first boom in the early 2000s. There are several key factors that have contributed to these prognostications – the continued growth of e-commerce and corresponding demise of brick and mortar retailing; the decline of the middle class (and corresponding growth of higher income and lower income populations) and the resulting impact on retailers who appeal to those diminishing middle class consumers; and the inevitable obsolescence of older shopping centers which have not had the capital necessary to appeal to contemporary tastes and desires.

These trends have continued to chip away at the fortunes of the U.S. shopping center industry. The Census of Retail Trade reported that non-store retailers (primarily consisting of e-commerce and mail order sales) reached an estimated $560 billion in 2016, accounting for 10.2% of total retail and food sales. However, once automobile sales, gasoline service sales, and food service and drinking places sales are factored out, non-store retailers accounted for 19.8% of total retail sales – 1 in 5 dollars spent by consumers! Ten years ago, non-store retailers accounted for 6.6% of total retail sales, demonstrating a significant growth. Many brick and mortar retailers have been aggressively growing their omnichannel capabilities, but the fact remains that e-commerce represents strong competitive factor whose share of the market continues to grow.

Shifts in income disparity have been more gradual. The proportion of total income accounted for by the lowest 60% of U.S. households was 25.6% in 2015, down from 26.6% in 2005. While hardly on the scale of e-commerce growth, this trend is having an impact on shopping centers whose primary appeal is not on the top tier of U.S. consumers.

The impact of these trends has hit home hard of late. In the last month alone, Macy’s, Sears, and Kmart alone have announced a total 218 store closures pursuant to a disappointing holiday shopping season, and more large store closures will undoubtedly follow. While the loss of an ancillary tenant (such as Wet Seal, with reports of its remaining 171 stores being shut down) has an impact on mall performance, the loss of an anchor tenant such as Macy’s or Sears can be devastating.

Top tier malls have been more resistant to these trends – the ability to cater to upper-income households, whose share of total U.S. income and wealth continues to grow, has to some extent mitigated the growth of e-commerce. Second tier and smaller market malls are bearing most of the brunt of these trends, and are fighting back as best they can. As their core retail focus shrinks, they are looking for entertainment, healthcare, and any other occupants they can find to fill the space. Their reactions are understandable – a shopping center is a fixed asset, and asset managers will do whatever they can to preserve and enhance the value of their assets. However, for many shopping centers, these efforts will prove to be inadequate. Does anyone believe that an urgent care center will provide anywhere near the draw that traditional retail tenants will?

When considering the ongoing declines in the fortunes of the U.S. regional mall industry over the next 2-3 years, in the words of Bachman Turner Overdrive, “You ain’t seen nothing yet.”

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