A Retool of Retail

Adapted from Shopping Center Management and Leasing, Second Edition

Shopping centers and malls are dynamic, ever-changing retail properties that have experienced, and continue to experience, change at a faster pace than perhaps any other property type.

Shopping essentially has always been considered a form of entertainment—an experience that stimulates the senses and often leads to a purchase. However, online retailing and same-day delivery services have entirely revolutionized the shopping experience. This is seen in a greater shift toward digital marketing efforts on behalf of retailers, shopping centers and malls. And to keep up with the pace of online retailing, more stores are creating easier and faster check-out experiences to accommodate these changing consumer needs.

Adapting to Shifts in Consumption

Future shopping trends indicate that more and more department stores will continue to close, consumers will continue to spend more money on services and experiences instead of apparel, and the number of online retailers will more than double. The shopping experience at malls will continue to reamain focused on selecting merchandise while also promoting opportunities for socializing, observing and participating in organized activities. Entertainment and promotional events will continue to bring people to malls, shopping centers and retail streets, with creative ways to keep shoppers at the properties for longer periods of time. At the same time, online retailers are starting to open brick-and-mortar stores in shopping centers in order to demonstrate their products to those who want to see and touch before they buy. These shops are also functioning as fulfillment centers for quick pick-up locations and easy returns of online purchases.

As consumers’ wants and needs change, so do shopping preferences and the venues for purchasing merchandise. Shopping center professionals—retail developers, shopping center managers, leasing agents and marketing personnel—must respond to industry changes, new retail delivery channels, a diversified consumer population and alternative retail venues. Among these changes include the downsizing and upsizing of certain retailers, the emergence of new retail concepts, and the failures of retailers whose concepts are no longer competitive and are being rejected by their customer base.

Impact by Commercial Class

Shopping center professionals are developing multiple strategies and tactics to compete with the trends of online retailers and take advantage of the changing retail environment. Certainly, some types of malls are being more affected that others.

Malls are typically categorized by the following three main classes:

1. Class A malls, or fortress malls, generally create the most profitable sales and have a good number of quality retailers in them. They are multi-anchored with more than one million square feet and will continue to outperform other malls, shopping centers and retail venues as they are more inclined to adapt to the changing needs, wants and shopping preferences of consumers.

2. Class B malls are typically anchored by the many department stores that have recently gone out of business. The income returns are generally mixed and are largely dependent on the regions in which they are located.

3. Class C malls are those that are struggling and at risk of becoming extinct. They may contain sections of vacant spaces and may even be considered a negative draw for the region. In some of these C malls, vacant space has been filled with alternative uses (e.g., office spaces, community centers, medical office clinics or government agencies).

Trends are showing that most B and C malls will struggle to survive as they lose—or have already lost—one or multiple anchor tenants. Likely developed with the first generation of malls, their locations were once the prime retail places in their areas. Once super-regional malls appeared, the tenant mix and sales of these B and C malls were weakened and will continue to decline as more online retailers impact department store sales.

Giving Retail Space New Purpose

According to the National Retail Federation (NRF) and data from the U.S. Census Bureau, online retail is projected to grow between eight to 12 percent, suggesting that e-commerce sales will reach between $427 billion and $443 billion. As the online retail growth continues to chip away at the traditional brick-and-mortar market, the class B and C malls are attempting to bring in more diverse tenants and offer experiences beyond just shopping. These malls may be redeveloped into lifestyle, entertainment, power or outlet shopping centers, which require redesigning and rebuilding all or most of the existing structure. Another alternative—especially for malls that are owned by REITs, property funds and institutional investors—is to demolish these struggling malls and build more mixed-use developments that include retail but with an emphasis on community integration.

Large stores may be subdivided into two or more stores and stores-within-stores and kiosks that can create a market square area within the mall or shopping center. Traditional anchor tenants may be replaced with service businesses and warehouses (e.g., Costco Wholesale or Sam’s Club), state-of-the-art multi-screen theaters, fitness centers and traditional or ethnic supermarkets. The new additions of these non-traditional uses—e.g., healthcare services such as optometry, dentist, physician groups and urgent care clinics—will generate greater traffic and require higher rent. In addition to these non-traditional uses, malls and other forms of shopping centers are dedicating more spaces for restaurants and other food purveyors.

Shopping Center Management and Leasing, Second Edition, is available now at www.irembooks.org.

Extending beyond the shopping spaces, more public and green areas are being added to existing malls and shopping centers to attract people and keep them longer. Pop-up stores, which can be good revenue generators, represent another trend that has proven to be popular among malls and other types of shopping centers. For instance, new retailers that do not want to run the risk or make the financial commitment of a five- to 10-year lease will start with a kiosk to test their retail concept or new product. In some areas, pop-up stores are so popular that cities and developers are creating pop-up villages; for example, allowing four to eight food trucks on a vacant lot. These experience-driven concepts are also adding microbreweries and beer gardens, which are great additions to the overall ambiance.

As online retailers continue to impact the future uses of shopping centers and malls, unique opportunities arise for managers to be involved in renovations, redevelopments or adaptive uses. Those shopping centers and malls positioned for success in the midst of the changing retail landscape will have a merchandising mix tailored to the local consumers and function as experience-driven destinations for entertainment and socialization within their communities.