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Regional Mall Owners Experiment with Supermarkets

The next step in the evolution of regional malls is actually a blast from the past as supermarkets — a staple in the early days of the sector — are making their return.

This month, Australian mall owner the Westfield Group announced it signed German supermarket operator Aldi to its Westfield Chicago Ridge property in Cook County, Ill. The deal is the latest in a string of Westfield leases with supermarket chains and grocers, as well as several transactions with warehouse club Costco. There are also supermarkets and warehouse clubs now operating at or near malls owned by the Macerich Co. and Taubman Centers.

Industry insiders say the trend is likely to spread similar to the way mall operators in the past added restaurants and movie theaters to the mix. In addition to generating regular traffic, supermarkets can fill vacant spaces left by closed department stores or other large tenants. Meanwhile, from a grocer’s perspective, taking space at regional malls may be the only way to penetrate densely populated areas with high barriers to entry.

“It’s an excellent strategy,” says Jeff Green, president of Jeff Green Partners, a Phoenix-based retail real estate consulting firm. “It’s a way to lease space to somebody who generates a lot of traffic on an ongoing basis. And because the mall pulls people from a greater distance [than a shopping center], it’s now seen as a pretty good place for food stores to locate.”

In the early days of regional malls, supermarkets and farmers markets were not an uncommon sight as either standalone tenants or as a part of department stores. But in modern times supermarkets gravitated away from regional malls. Malls charge higher rents than shopping centers, which made the sector less appealing for grocers, says James C. Bieri, president and CEO of the Bieri Co., a Detroit, Mich.-based retail real estate consulting firm.

In addition, mall tenants face higher common area (CAM) charges than shopping center tenants, adds Matt Winn, managing director, retail consulting, with brokerage firm Cushman & Wakefield. Supermarkets have razor thin profit margins, so they couldn’t afford to pay the premium to be located in regional malls. Parking availability and easy road access were also concerns.

Foot traffic at Westfield Southcenter in Seattle has increased 26 percent since the addition of the Seafood City supermarket. In today’s environment, however, landlords have become more willing to negotiate on deal terms, both because they are trying to fill vacancies created by department store bankruptcies and consolidations and because they need tenants that are traffic drivers.

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