Can New Interest Fuel Mall Rebound?

LOS ANGELES — Mall retail is beginning to see a turnaround, although there are still big obstacles ahead.

After vacancy rates soared during the recession, mall operators are now seeing increased demand for space and higher rates of consumer traffic.

According to Reis Inc., malls in the top 80 U.S. markets reported an average vacancy rate of 9.2 percent in the fourth quarter, down slightly from 9.4 percent during the third quarter, which was the highest rate Reis has measured since it began tracking vacancies in 2000. By comparison, in 2007, the vacancy rate in malls was 5.5 percent.

Faith Hope Consolo, chairwoman of Prudential Douglas Elliman Real Estate’s Retail Group, said vacancies are improving because retailers are seeking to expand and developers are offering slightly lower rents.

“Overall, shopping-center vacancy remains historically high, but mall levels are picking up slightly,” she said. “Retailers are cautiously expanding again. With little new construction, shops that hadn’t considered malls are now doing so to fulfill their own growth plans.”

Consolo said a number of footwear retailers are now vying for mall space, including DSW, Off Broadway Shoes, Ugg and Dick’s Sporting Goods.

For Michael MacDonald, president and CEO of DSW Inc., the current economic situation in the U.S. has created some unique opportunities. The retailer recently announced it had doubled its new store openings for 2012 to 35 to 40 doors, mostly in mall-based locations. The move was an opportunistic venture that came about with the bankruptcy filing of Borders bookstores.

“With their bankruptcy, their real estate came on the market,” said MacDonald. “We have a pretty sophisticated market-evaluation system to identify exactly where our market voids are, not just by city but by neighborhood. It just so happened that a lot of the Borders locations were in specific locations that met our market-void criteria.”

MacDonald said the footprint of the stores was also a close match. “Our average store size is between 22,000 and 23,000 square feet,” he said. “That’s pretty close to the Borders stores.”

Marshal Cohen, chief industry analyst at The NPD Group, noted that malls are benefiting from a change in shopping patterns, what he termed the “new traditions” at retail. “This includes extended hours and new types of sales and holiday-shopping days,” he said. “What that does to retail is change the dynamic. It makes the mall important again.”

Cohen said mall operators are taking a new approach to the way they lease space. In the wake of the announced closings of anchor stores such as Sears and Macy’s, Cohen said mall execs are rethinking the layout of those spaces. “They are getting creative about splitting up that space [that was once an anchor store],” he said.

That’s not to say rents will see much movement. “Mall owners aren’t going to give away the house,” Cohen said.

However, operators are more willing to work with tenants on incentives to help make a mall location more economically viable, Cohen said.

But not all retailers are as upbeat on the future of malls.

Speaking at a recent Financo Forum in New York, J. Crew Group Chairman and CEO Mickey Drexler voiced his frustration with mall developers. “Right now, there is a diminishing return,” he said. “I just wonder where it all takes us.”

Drexler cited the overcrowding of similarly themed stores in malls, as well as the proliferation of low-cost retailers. “More cheap players [are] entering the marketplace than ever before,” he said.

Later, Robert Taubman, chairman of Taubman Centers, offered his response. The executive said his business is up 13 percent year to date, due to increased traffic. “We are driving more traffic in our centers. Our value proposition is better. That’s why you [Drexler] should be paying more rent.”

More From Our Brands

Access exclusive content