Pacific Retail Capital PartnersPacific Retail Capital Partners
Pacific Retail Capital PartnersPacific Retail Capital Partners

Triangle malls back in business, but retailers need new strategies to attract wary shoppers

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Jun 26, 2020, 6:47am EDT  

Malls are reopening across the country, but are often about half-full, with parking spots available in prime locations and even the most popular stores free from long lines.

On a recent sunny afternoon at Crabtree Valley Mall in Raleigh, there were hundreds of parking spaces available. Traffic inside was roughly half of a normal day, with cookie stores waiting for customers, escalators carrying only a passenger or two and many stores, including Apple, closed.

Even at a dominant retail center such as The Streets at Southpoint, traffic is seeing traffic only half of normal levels.

But Southpoint, at least, is positioned to survive despite the length of the pandemic. As the pandemic continues, experts are saying the demise of weaker malls will only be accelerated.

Industry projections that previously said one-third of all malls would close by 2030 have been accelerated by Covid-19, and Jeff Green, a partner in the Hoffman Strategy Group, now predicts that a third of all malls will be gone by 2023, possibly by 2022.

“Any mall that was classified as a B or C, meaning it was struggling or ratty, will face certain death sooner rather than later,” Green said, who is based in Phoenix and works with retail real estate clients around the country.

While everyone agrees Covid has flipped the fast-forward switch on the inevitable demise of brands and properties that have been bordering on obsolescence, the conversation unfolding across the retail industry is increasingly about transition and reinvention in the face of ongoing uncertainties.

“The only thing we can be certain of is that there will be profound change,” says Howard Meitiner, managing director, Carl Marks Advisors and former CEO of Sephora and The Museum Shop. “One of the things that will drive this is how consumer behavior changes in light of the health crisis as well as how new businesses have stepped up, particularly in the online side.”

Jan Kniffen, a retail industry analyst who spent 20 years in senior management at May Department Stores, has been sounding a similar alarm for years. As early as 2014, he said the U.S. had 300 malls too many. Since Covid, Kniffen said as many as 500 of the roughly 1,000 malls in America should close. And the same dire outlook holds true for retail stores.

“We will see more damage faster than anticipated because the trend to online shopping will accelerate,” he said, noting his earlier forecast that the industry would lose 10,000 stores a year for more than 20 years has also ramped up.

“I think this year we could lose 50,000 stores, and I wouldn’t be stunned if we lost 100,000 stores between now and early 2021.”

The consensus among analysts and industry professionals is that the top-ranked malls will survive.

“The percentage of people shopping in malls will fall over time,” Kniffen warns. “But remember, there are 278 great malls, and those great malls can see rising foot traffic, rising rents, rising occupancy rates. The problem is that there are 1,000 malls and that’s too damn many.”

In the Triangle, Green said, “The big winner here is The Streets at Southpoint, and maybe North Hills in Raleigh. From a sales­per-square-foot standpoint, those are the strongest centers.”

“The people who will struggle now, that have never struggled in the past, is Crabtree,” he cautions, noting that “the mall has declined, and when North Hills was redeveloped it really hit Crabtree.

“Also, digitally native brands that are expanding into brick and mortar, like Warby Parker, tend to like North Hills better than enclosed regional malls. If you look at the retailers that are probably going to struggle the most it is those national tenants — like New York & Company, Express, The Children’s Place — those are the folks in Crabtree.”

Reinventing Crabtree

Since its inception in 1972, Crabtree Valley Mall has been one of the biggest and most successful enclosed malls in the region. In recent years, that reputation faltered as flashy competition came from North Hills and Durham, and traditional malls around the country slipped from dominant to diminished as big-box anchors struggled with the online shopping surge.

But two trends bode well for a Crabtree renaissance: Raleigh is a market projected to rebound strong, and new talent has taken the reins to lead the shopping center forward.

Pacific Retail Capital Partners, which took over management of Crabtree on April 27, manages more than $2 billion in assets with over 12 million square feet of regional, open-air lifestyle and mixed-use centers. Green acknowledges that Pacific Retail coming on board to manage Crabtree is a big advantage.

“Pacific Retail is a strong company; they are very creative and they are accustomed to taking B malls, and doing the best they can to stabilize them,” Green said.

Leslie Himley, Crabtree’s marketing and business development director, said consumer traffic has been rising quickly since the mall reopened. Traffic jumped 41 percent from Saturday, May 30, to June 6.

The curbside pick-up program is also taking off. “We have great participation – already 28 percent of our tenants, 40 stores, are using the curbside program, and at least seven more tenants have said they will be using curbside when they open,” Himley said. “Covid was obviously the start of curbside, but a lot of our tenants want to continue with the curbside program as we go forward.”

The curbside approach is part of a push in retailing to be more “omnichannel” – that is, reach customers in a broad variety of ways.

“The pandemic created the opportunity for all retailers to become omnichannel, and the brands that didn’t take advantage at this time are probably going to suffer,” says Najla Kayyem, senior vice president of marketing at Pacific Retail. “There were a lot of knee-jerk reactions during this crisis to move entirely online, but what makes really good brands so great is their clarity in recognizing the wants and the needs of their specific consumers.”

That can include everything from offering a touchless experience to diversifying retail operations across various platforms so consumers can pick up curbside, shop in physical stores or buy online and have it shipped.

The move to omnichannel

Omnichannel has been the buzzword in commercial real estate for a while, and the pandemic has accelerated this trend.

Southpoint, too, has seen the popularity of its curbside pickup surge.

Pat Anderson, senior general manager of The Streets at Southpoint, said,“It’s hard to predict the future, but curbside has an increased value and customers are accustomed to using it now.”

Initially, shoppers seemed more inclined to spend time in the outdoor lifestyle area. Now, Anderson said the traffic is as balanced between the interior and exterior settings as it was in summers past.

The intent, Anderson notes, is to do “whatever we can to help tenants get back to normal and to keep customers comfortable as they find their way back.”

Curbside reinforces both commerce and comfort levels; currently, there are 31 Southpoint tenants participating in curbside service.

That continues the evolution in shopping, one that accelerated with the surge in online shopping.

“Online retail sales will be up well over 50 percent in one year, if not up double,” Green said. “[In the first quarter], about 12 percent of all retail transactions were over the internet; I wouldn’t be surprised to see that go to 20 to 25 percent by the end of the year.”

Consumer reluctance to return to in-store shopping isn’t all about fear; it’s also about changed behaviors, and convenience and affordability play a role as well.

As Meitiner highlights, developing omnichannel excellence requires rethinking the physical space as well as the online offering. Larger formats will need to go smaller, and the number of locations will need to streamline.

“This reduction in the number of locations will be a challenge for landlords,” he notes. “And it begs the question: ‘Where is the next generation of tenants coming from?’ There was a nice boost 10 to 15 years ago with all the cellphone companies opening retail stores.

“I think we will see a new era of tenants who are responding to the millennials and the new generations who are looking for different things. It’s going to be very difficult for retailers who are not offering an experience to maintain the same footprint.”

Anchors away

Department stores, which were already skating on the edge of extinction, have the greatest need to downsize their footprints and rethink their models.

“The reason department stores are such large sizes is to accommodate all of that product. Why have a store that’s 150,000 square feet, carrying 250,000 SKUs (stock-keeping units) and trying to stay in stock of every color and size of every item? It’s just crazy,” Meitiner said.

Instead, the department stores could take another chapter from Amazon and become showrooms, places to browse products that can be ordered and fulfilled from a central warehouse to home delivery.

That’s the kind of reinvention Meitiner envisions: “Instead of department stores carrying millions of dollars of inventory they don’t really need, they can centralize the inventory and become much more efficient. And if consumers want to order online and pick up at the store they could do that as well.”

Kniffen cites Nordstrom as a good example of a department store that gets it. “Nordstrom was an early adopter of omnichannel; they still have big stores, but they’ll have fewer big stores going forward. They’ve built these 1,500-square-foot satellite stores that are all about personal services.”

Indeed, the brand the company introduced in 2019, Nordstrom Local, is made up of small stores that carry no inventory but facilitate pickups, returns, and a host of services through intimate neighborhood shops. There are two locations in New York City and three in Los Angeles.

But even retailers that embrace reinvention are facing some dark days ahead.

Kniffen asserts, “We know that Nordstrom is going to close 19 stores, minimum. There will be fewer Neiman Marcus stores, probably fewer Saks stores, and there probably are not going to be any Lord & Taylor stores when Covid is over. Macy’s has already said they’re going to close 125 stores, but I think Macy’s will close 200. J.C. Penney has said it will close a bunch of stores, but I think they have to close at least 350 of their 850 stores. I don’t think there will be any Sears or Kmart stores left when this is over. And I think there will be fewer Stage stores, Boscov stores, and Stein Mart stores — and that’s just going through the department store space.”

In his estimation, 20 percent of the national stores inside malls will close. Local mom and pop stores will close as well, but as he explains, that happens every year, and every year new mom and pops emerge. However, there will be more attrition of local and regional stores in 2020 than in years past.

Still, Meitiner cautions against writing off the shopping center industry and points to how quickly shoppers have returned to retail in the United Kingdom.

“They just opened up (in the U.K.) and people are shopping like crazy, as if they just rediscovered shopping as a new form of entertainment — so the pronouncements about the death of retail, that shopping malls will just become dust bowls, it’s too easy to predict those broad-sweeping assumptions,” he said.

Future moves

Looking ahead, the hotter topic within commercial real estate, Kayyem said, is how to value shopping centers and stores in a new environment.

In its 2019 annual report, Brookfield Properties (owner of Southpoint) said average sales per square foot at its core retail properties was $798.

“Sales-per-square-foot used to be the end-all, be-all metric and now that’s completely changed,” Kayyem said. “With the omnichannel model, stores are being used as showrooms, stores are being used for fulfillment and stores are used in a variety of ways to connect with the consumer.”

Malls and retailers alike have to create a point of differentiation, something that entices the consumer to visit and to shop.

As Kniffen recounts, years ago malls were built with food courts because developers thought consumers would want some down time while they were shopping. Then they started building malls with great restaurants, so people would come to eat and shop.

“Experiential retailing is not dead; it’s had a huge setback because of Covid, but this trend to more restaurants and more things to do in the mall is going to continue,” he said. “And the malls that do it well, even if they aren’t in that top 278, will in fact be the survivors.”

The best path to reinvention may be waiting to be defined, and in Meitiner’s view, quite possibly involves augmented reality or a tech-enabled experience.

“It took a tech company to teach retailers a new way of retailing,” he said. “When Apple came out with stores, they reimagined retail in a way that I wasn’t capable of doing, and I’d been in retailing for decades.

“Sometimes, merging with people who are not encumbered with all of your experience and prejudices is a way of breaking through to new opportunity. If I were a shopping center today, I would certainly be thinking about that.”

Connie Gentry
Reporter Triangle Business Journal

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