CREJ - Retail Properties Quarterly - August 2017
A current retail storyline in the national media is that the days of regional malls are numbered. The assumptions underlying this narrative are that purchases are moving online, retailers are going bankrupt, and millennials have rejected the suburban mall and the lifestyle it represents. Unfortunately, these claims are not entirely unsubstantiated. On a national scale, the number of store closures is reaching a level unseen since the depths of the Great Recession in 2009. Between January and April, major retail chains announced plans to shutter over 3,500 stores nationally. This accounts for more than 62 million square feet, or 0.6 percent, of all retail real estate across the country – a significant amount of space to go dark in the span of four months. Credit Suisse predicts that up to 8,600 brick-and-mortar stores will close their doors in 2017. Much of the focus for this deterioration has been placed on millennials, the rise of e-commerce and the cultural shift toward experience-based spending. In the current digital age, it is argued millennials no longer go to physical stores to buy the few material possessions they have, and the increased popularity of e-commerce has given all consumers a new avenue for purchasing goods. Retailers are now faced with the difficult task of adapting to compete with the growing nature of e-commerce, shifting demographics in America’s suburbs and the rise of experience based retail. Despite the growing number of stories that focus on malls’ demise and the reality that approximately 12 percent of all retail purchases are completed online, regional malls nationally have had positive net absorption since 2010 (the only blip in absorption was in 2009 at the height of the recession). At the end of 2016, occupancy across the U.S. was 95 percent, equating to 848 million sf of space. The story within the Colorado retail sphere is even more upbeat. There has been over 1.2 million sf of positive net absorption in the state’s 19 malls since 2010, with current occupancy over 96 percent, equating to 19 million sf of occupied space. While Colorado isn’t completely immune to bankruptcies and closures from retailers such as Sports Authority, J.C. Penney, Sears, Gordmans, Golfsmith and Payless ShoeSource, the volume of closings appears to be less severe in the state than in other parts of the country. For example, Sears Holdings, which operates both Sears and Kmart stores, announced it would close 237 stores nationwide in 2017. Only two of the 237 are in Colorado, which leaves 44 Sears and six Kmart locations operational throughout the state. Macy’s, another prominent mall anchor, also underscores Colorado’s relative resiliency. In 2017, Macy’s announced it would shutter 68 of its stores nationwide, but none of Colorado’s 14 Macy’s locations were closed. Why the seemingly optimistic outlook for Colorado’s retailers compared with the national trend? Colorado’s economy is outperforming much of the nation. A large contributing factor for this growth is that, according to a recent study by Zillow, 18- to 34-year-olds accounted for 35 percent of Denver’s population growth from 2010 to 2014, up from 26 percent in the first 10 years of the century. Not surprisingly, malls with the highest levels of occupancy are in areas where the millennial population is growing rapidly. Despite all the attention on urban living, it is anticipated that many millennials will follow a similar path as past generations and eventually make the migration to suburban America where they will be settling down, buying homes, having children and doing activities that lead to the acquisition of goods – meaning a potential increase in shopping. As millennials continue to trend toward experience-based spending, they will require a different kind of gathering center than the traditional suburban mall their baby-boomer parents frequented. As a result of this new demand, malls have rolled with the punches by finding new tenants, alternative uses and redesigning their spaces to appeal to the shifting demographic. The advantages of regional malls are too good to pass up – namely, they are conveniently located to consumers, offer ample parking and often have large space blocks that are unavailable in other venues. Several traditional malls in Colorado have already made the transformation into community destinations, including Belmar, Streets at SouthGlenn, Twenty Ninth Street, Gardens on Havana and Foothills. These transformations often include shifting from enclosed hallways to open-air spaces that bring in natural light, incorporate pedestrian walkways and focus on community gathering areas. Sleepy department stores, record stores, trendy apparel chains and novelty stores are being replaced with fresh, high-energy concepts. Entertainment users such as Jump Street, Round One and movie theaters as well as fitness users including Colorado Athletic Club, 24 Hour Fitness, boxing and rock climbing gyms are all benefitting from the recent churn in tenancy. It is anticipated that regional malls will continue to experience more closures from anchor tenants. Contrary to popular belief, this can be positive news for the properties, as many of the pending closures are tenants that bring limited value to the community and mall owners. As mall owners regain control of this space, there will be an increase in traffic-generating uses, namely more entertainment as well as fitness, office, medical and community uses. The successful conversion to alternative uses depends greatly on the surrounding demographics, foot traffic and potential rental income. In many cases throughout suburban America, a repurposed mall may far exceed value as conventional retail space. Although one thing is certain: The regional mall in Colorado is far from being extinct. It is evolving into a new type of gathering place that meets the needs of its changing communities.