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Entertainment Offerings Help Keep Malls Out of the Morgue

The redevelopment plan for Plano’s Collin Creek Mall, which originally opened in 1981 near the intersection of U.S. Highway 75 and the George Bush Turnpike, currently includes 300,000 square feet of indoor and outdoor retail space and a 200-room hotel with 40,000 square feet of event space. Project costs are estimated at $1 billion. Demolition work began in September.

Much has been made about online retail — and rightly so — with Amazon now an integral part of everyday life in the United States.

But e-commerce’s growth doesn’t mean brick-and-mortar retail is dead. Brick-and-mortar outlets can be viable and profitable, even as retail bankruptcies and store closings increase.

Real estate professionals should battle the misconceptions behind retail in 2020 and beyond while keeping an eye on where the next generation of retail is headed. The mall of 1975 is no longer. But could these retailers reemerge in hotel lobbies, airports/transportation centers and medical centers?

Total retail sales have increased at an average annual rate in excess of 4.35 percent since 1993, according to Trading Economics. Additionally, most retailers’ quarterly earnings statements — whether from Walmart, Target, Home Depot or major grocers — report increased physical same-store and online sales (with a few exceptions noted later).

While online sales have yet to reach 10 percent of total retail sales, the growth is on track to make a material impact by 2025, with 20 to 25 percent of total retail sales projected at that time.

K.C. Conway, CCIM Institute

If it’s not in-store sales lost to online consumption or recessed consumption post-Great Recession, what’s behind the bankruptcies and closures? In a word: overleverage.

This financial facet of brick-and-mortar retail peaked in 2006, when CMBS debt issuance for mall properties exceeded $15 billion with peak loan-to-value (LTV) ratios surpassing 70 percent. Retailers felt the acute pain of being overleveraged when growth slowed, the Great Recession hit and the cost to debt service overtook revenue growth.

Additionally, the country is over-retailed. Research by International Council of Shopping Centers (ICSC) and CoStar Group shows the United States has more than 115,000 shopping centers covering 7.5 billion square feet.

According to PricewaterhouseCoopers (PwC), there is approximately 24 square feet of retail space per person in the United States — 50 percent more than second-ranked Canada, twice that of third-ranked Australia and nearly six times that of the UK PwC forecasts that U.S retail space will need to shrink toward that of Australia to rebalance — a contraction of more than 50 percent.

Future closings will be determined first by leverage and then by technology gaffes. Currently, malls are closing at an annualized rate of 75 per year. But mall construction isn’t dead quite yet. In the fourth quarter of this year, one of the 10 largest malls in America will open in New Jersey.

Triple Five Group, the Canadian developer that previously built two of the three largest malls in North America, including Mall of America, has opened its 3 million-square-foot American Dream Meadowlands. About 55 percent of the mall’s user base will be entertainment and 45 percent  (about 500 stores) will be retail.

The mega-mall will offer various experiences to lure traffic and generate revenue beyond rent from stores, including the first-ever indoor snow park and largest indoor water park in North America, a Nickelodeon Universe theme park and an NHL-sized hockey rink. The mall is not obsolete; it is just going over the top on entertainment offerings.

Retail Trends of the Future

Looking ahead to 2025, the brick-and-mortar retail sectors most at risk are apparel-centric shops and department stores. Retailers burdened by debt that also lack services to accompany their products are merely commodities that can be moved to warehouses and marketed exclusively online.

A recent casualty example of this phenomenon is A’gaci, a Texas-based women’s apparel retailer that just declared bankruptcy for the second time in two years. Expect more retail closures for both debt and non-debt burdened retailers that do not integrate service offerings with their products.

Two examples of retailers that recognize the synergistic pairing of services with product are Build-A-Bear and the PGA Superstore. Build-A-Bear is about the experience and process of creating an almost lifelike stuffed animal by children complemented by year-round special events and birthday party experiences. The company is discovering how to migrate into the hospitality space and out of the mall to extend its unique offering into destination hospitality concepts like Great Wolf Lodges across the country.

The retail concept of the PGA Superstore, a company that is not overleveraged, offers myriad services to complement its golf and tennis products, such as lessons and custom on-site club and racquet fittings. These offerings transform buying golf gear as a commodity into an experience in much the same way tailoring used to be commonplace in clothing stores.

What’s Old Is New Again

Many of these retail centers benefit from great locations ideally suited for adaptive reuse, especially with the benefit from the 2017 Tax Cuts & Jobs Act as pertains to opportunity zone programs. These incentives mitigate the adverse impact from overbuilding and overleverage.

Adaptive reuse of retail centers and malls will be the most powerful trend for retail between now and 2025. Numerous examples illustrate the clear benefits of repurposing larger vacant retail spaces like malls.

Many large cities, including Dallas, have created downtown historic districts. Developers are utilizing tax credits to buy historic properties for adaptive reuse projects that preserve building façades but redesign and renovate the interiors.

For example, a Dallas partnership of business and community leaders is spearheading an effort to transform the historic Main Street district into a residential and retail destination by using part of the property tax generated by downtown businesses to fund various improvements and to remove asbestos from empty structures.

Shopping centers and malls are essentially the mid-20th century adaptation of the historical marketplace. The 21st century version is Amazon and the virtual e-commerce marketplace. Each iteration disrupts the prior format, which is what is occurring today.

Those who adapt will survive this extinction event. Those who don’t will go the way of the dodo bird, rotary phones and Blockbuster.

— By K.C. Conway, chief economist and director of research, CCIM Institute. This article first appeared in the December 2019 issue of Texas Real Estate Business magazine. 

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