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Malls Continue to Fend Off Their Critics

For the past decade, many real estate experts have been clanging the death knell for malls. Now it sounds like the ringing's getting louder. Department store customers keep leaving for discounters. Meanwhile, non-anchor mall tenants have experienced little, if any, sales growth over the last three years. Certainly, the grim reaper is planning his own version of a shopping spree with a well-honed sickle.

But wait — somebody forgot to tell mall owners about the much-predicted doom. In fact, most of the regional and super-regional malls are still miles away from death's doorstep. By employing aggressive acquisition, renovation and re-merchandising strategies, mall owners are boosting rents and occupancy. Between the first quarter of 2000 and the third quarter of this year, mall asking rents climbed 10% to $37.85, according to Reis Inc., a New York-based commercial property research firm. Mall vacancy in the third quarter registered 5.7%, an improvement from 6% a year ago.

Investors like what they see. According to the International Council of Shopping Centers, real estate investment trusts (REITs) own or have an interest in nearly half of the 1,130 malls in the country. Through Oct. 31, 2003, the publicly traded REITs tracked by the National Association of Real Estate Investment Trusts (NAREIT) generated a startling 41.85% total return, nearly double the S&P 500's 21.21% total return. (Total returns include price appreciation and dividend yield.)

In 2004, the mall REITs will have a tough time matching their 2003 stock price run-ups, but analysts expect the mall owners to increase earnings by 9% next year after an anticipated earnings increase of 7% this year. “There's just too much demand out there for the amount of good space that's currently available,” says Richard Moore, a retail REIT analyst with McDonald Investments in Cleveland.

Aggressive Reinvestment

Constrained mall development and the closing or transformation of older malls into other real estate products have convinced major mall owners and developers to spend billions of dollars expanding and renovating their portfolios. By doing so, owners intend to tap into that demand and at the same time diversify their tenant rosters.

But from where is the demand coming? Through August 2003, non-anchor mall tenants have seen an anemic 0.9% increase in sales per sq. ft., according to ICSC's Monthly Mall Merchandise Index. Department store woes continue, too, punctuated by the May Co.'s summer announcement that it would close 32 Lord & Taylor stores in 15 states. Department stores only share in some 3.5% of all retail sales compared with 6% a decade ago, according to information compiled by Customer Growth Partners, a customer loyalty consultant in New Canaan, Conn.

But retailers anticipated the recession years ago and primed their balance sheets accordingly, says Michael P. McCarty, senior vice president of research and corporate communications at Simon Property Group in Indianapolis, the nation's largest mall REIT with an interest in 182 million sq. ft. Retailers are now ready to ramp up for the recovery.

Meanwhile, department store mall anchors are welcoming retail darlings like Kohl's and Target into malls to take advantage of the traffic they generate. Up until now, the traditional anchors resisted adding such tenants to a mall's roster, he says.

Simon has renovated 85% of its mall portfolio over the last six years, McCarty adds, and the company anticipates spending as much as $250 million in 2003 on renovations and expansions, including the ongoing $139 million, 175,000 sq. ft. addition to the Forum Shops in Las Vegas. As renovation and acquisition activity continues, so will the aggressive posture to add new, diverse tenants that consumers favor. “That's the way we've been growing earnings — by focusing on those areas in particular — over the last couple of years,” he says.

Competition for Revenue Heats Up

CBL & Associates Properties Inc., a publicly traded real estate investment trust based in Chattanooga, Tenn., that has an interest in 63 million sq. ft. of malls and community centers, is pursuing a similar strategy. Bed Bath & Beyond, which typically operates in power centers, is one of the anchors at its Coastal Grand mall in Myrtle Beach. The 900,000 sq. ft. center is slated to open in March as a 50/50 joint venture with Myrtle Beach-based Burroughs & Chapin Co.

In Madison, Wis., CBL recently completed expansions at the East Towne and West Towne malls, where two Dick's Sporting Goods are replacing two former Boston stores.

Those projects are part of a larger development and renovation pipeline valued at $155 million. “We have 59 enclosed malls, and it's the bulk of our revenues,” says Stephen Lebovitz, president of CBL. “We spend a lot of time, effort and money renovating them, as well as adding new stores and boxes, to solidify their competitive position.”

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