Across the US, retail headlines are announcing the imminent ‘death’ of the American shopping mall.
Many point to an outdated department store model, traffic loss from ecommerce growth and rampant bankruptcies among in-line tenants as the forces that will eventually drive the mall to its ultimate and inevitable demise.
Still, others suggest a more fundamental issue in oversupply, pointing to the US’ 23 sq ft of shopping centre space per capita, versus the UK’s 4.5.
However, a closer look at data and case studies on the ground reveal that the mall’s prognosis is more nuanced than these headlines suggest.
What really is wrong with the US mall, what will happen to it – and what can that tell us about the future of the shopping centre in the UK?
One key challenge to the American mall is its merchandise mix. In the average US mall, department stores occupy almost half (48.7%) of gross leasable area (GLA), while apparel and accessories stores occupy another 29.4%.
These are unfortunately two of the slowest-growing retail categories in the US. They are also among the highest for ecommerce penetration.
Though these categories were once key traffic and sales drivers, they are no longer the draws they once were, and mall landlords must move to higher-growth categories with less ecommerce exposure, like restaurants, home furnishings, services and entertainment.
Over the next 10 to 15 years, saving the US mall will involve addressing the mismatch between the merchandise mix and consumer demand.
This will be critical to attracting traffic and, ultimately, spending at the mall. However, the approach may look very different from one market to the next.
“The future of each property must be assessed according to its unique combination of market demographics, competitive landscape, tenant mix and physical infrastructure in order to identify the appropriate solution”
In areas with strong density, favourable demographics and limited competition, this may mean a simple shift of tenants towards those categories of higher-growth, lower ecommerce penetration mentioned above.
In other cases, it may involve the redevelopment of a property and incorporation of non-retail uses such as office, hotel, and residential that will drive traffic flows.
For malls that face more structural changes in their markets, such as population loss or increased competition from new retail sites, the solution may indeed be in a reduction (or full closure) of the retail stock.
Many estimates exist as to what percentage of the US mall stock will survive – some argue that only prime or grade A malls will survive, leaving the remaining two-thirds of the mall stock to disappear. I, however, argue that this is too simplistic an analysis.
First, we must define “disappear”. Conversion from retail to traffic- and revenue-generating non-retail uses such as healthcare, multifamily or hotels is hardly a negative.
Second, there is no one-size-fits all solution to “the mall problem”. The future of each property must be assessed according to its unique combination of market demographics, competitive landscape, tenant mix and physical infrastructure in order to identify the appropriate solution.
Third, the future of each property will also be heavily dependent on the availability of capital. Redeveloping a property or changing a tenant mix requires both time and investment, and the willingness and ability of investors to take a bet on a segment with such negative headlines will be a challenge to overcome.
However, overcoming that sentiment and accessing capital will be key to taking malls into the next stage of their evolution.
Implications in the UK
Key differences between the mall landscapes in the US and equivalent shopping centres in the UK mean that the prognosis looks very different between the two countries.
As mentioned above, the structural difference in the sheer number of centres means that ones in the UK face less risk of oversupply than in the US.
Secondly, the location of US malls versus the UK’s is an important distinction. While American malls are primarily a suburban phenomena, shopping centres in the UK are often located in urban areas, which provide steadier exposure to traffic flows even as consumers shop online.
“Paying close attention to shifts in consumer demand and retailer category growth is critical – and mall owners will need to adapt to these shifts with the appropriate tenant mix if they seek to thrive well into the future”
However, the lesson we are learning about tenant mix in the US has been evolving for some time in the UK.
Paying close attention to shifts in consumer demand and retailer category growth is critical – and mall owners will need to adapt to these shifts with the appropriate tenant mix if they seek to thrive well into the future.
Food and beverage will continue to play a critical role. Any centre that allocates less than 10% of gross leasable area to food and beverage is unlikely to be sustainable, and we will see 25% becoming the norm.
Significant new retail developments in Bracknell and Oxford have opened recently with great success.
They are anchored by Fenwick and John Lewis respectively, with both department stores bringing new innovation and enhanced in-store customer experience.
Each department store has been fundamental to the positioning of the respective shopping centres. Greater operational efficiencies and multichannel capabilities have allowed them to trade from what are – by historical comparisons – smaller stores.
In the US, as in the UK, the shopping mall is far from dead. It is, however, transforming.
As with most instances of change, those owners that resist the transformation will face difficulties in the future, while those that adapt and innovate face excellent prospects of making it through the segment’s next evolutionary stage.