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Coronavirus Will Kill Lots of Malls

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It would be sort of fitting: Department stores, on a long decline because of the shift toward online retail, could be replaced by Amazon fulfillment centers, delivering products to customers who don’t go to the mall much anymore.

That’s what The Wall Street Journal reports: Amazon is having talks with the largest mall operator in the U.S., Simon Property Group, about taking over vacant or soon-to-be-vacant J.C. Penney and Sears stores for this purpose. I’m not sure this is actually going to happen — while malls tend to have locations near major highways that make them good for delivery fulfillment, it’s not obvious the stores are shaped correctly for this use — but the conversation reflects the increasingly challenging position of mall operators, who see the slow decline of mall retail accelerating into a crash, and will need to find something else to do with a lot of their real estate.

“A lot of the time when you had a product that was limping along, it could limp for a while,” said Simon CEO David Simon on an earnings call earlier this month. “That half-life has shortened over the last five, six, seven years. Now, it’s like immediately shortened.” Simon said a Wall Street analyst’s suggestion that the U.S. needs 20 to 30 percent less retail real estate than it currently has was “within the realm of possibilities.”

What’s so strange about the Amazon fulfillment center idea is how little it would do to help a mall survive. A mall is like a living organism: If you cut off one of the limbs, the rest of the body starts to decay. Anchor stores enjoy low rents in significant part because they draw customers into the mall, creating foot traffic that makes it an attractive place to operate the in-line stores that pay higher rents. Those in-line stores often have clauses in their leases that let them pay less rent or vacate if a nearby anchor is closed. So when an anchor store closes, mall operators try hard to replace it with something else that will keep the organism healthy by bringing in foot traffic. An Amazon fulfillment center would do nothing to draw customers, except that some Amazon workers might shop before or after work.

But what are the alternatives? An executive at Macerich, another large mall operator, provided a list of possibilities on that company’s earnings call this week.

“Look for failed anchor stores and failed specialty stores to morph into mixed-use developments, whether office, residential, and/or hospitality,” he said. “This inventory will also provide opportunities for large-format categories such as sporting goods, off-price, value, fitness, co-working, health care, and grocery.”

These strategies — many of them involving demolishing part of the mall to build an entirely new structure, like an office building — have driven a lot of successful mall redevelopments over the last two decades. In particular, mixed-use developments can be symbiotic: The remaining piece of the mall is an attractive amenity for residents or workers, while the new development creates an additional customer base for retailers in the mall. But there are significant challenges with pursuing them right now because they involve significant construction expense at a time of weak demand, or they involve trying to find a new tenant in an industry that is struggling.

I am more bullish than average on the medium-term outlook for office real estate, but the aftermath of a deep recession in which many white-collar workers have been working remotely is not a good time to develop new office buildings. It remains to be seen how persistent the drop in business travel will be, and therefore what kind of demand there will be for new hotels at shrinking malls. Apartments are less impacted by COVID-19–specific economic trends than offices or hotels, but weak economic times are not the best time to build them, either. I am skeptical that you are going to see significant co-working expansions soon. Even health care, typically one of the real-estate uses most immune to economic cycles, is troubled due to the interruption of routine care.

Prior to the pandemic, one strategy to revitalize malls was to bring in more “experiential” uses that can’t be done online. They added more restaurants, movie theaters, fitness facilities, salons, and the like. In the long run, this may still be a good strategy, but these uses are all severely impacted by the pandemic and it will take a significant amount of time for them to get back up to full use of their pre-pandemic locations, let alone expanding to new ones. And COVID-19–driven adaptations have made me question how tied all these uses really are to brick-and-mortar space, especially fitness, which is increasingly being delivered virtually.

Grocery stores present one interesting option for mall operators. Grocers were one of the few retail categories that saw sales rise during the pandemic. They tend to survive recessions, which is good for property owners who want a tenant who will keep paying rent and keep drawing customers to the shopping center even in a bad economy. But grocery stores don’t really fit inside malls very well — grocers have specific layout and parking requirements — and so bringing a grocer to replace a J.C. Penney may mean tearing down the J.C. Penney and building a freestanding grocery store in the parking lot. The Journal notes that Amazon’s soon-to-launch grocery brand, which would be less upscale than the Whole Foods brand, is a possible tenant for vacant anchor store spaces in malls. Because these stores would be smaller than traditional grocery stores, they may fit better in existing department store buildings. So that is one Amazon-in-malls angle that would work better than a fulfillment center to keep a mall healthy.

Finally, one thing you can do with a struggling mall is close it entirely. As the Journal notes, while the idea of putting an Amazon fulfillment center inside a mall is new, Amazon and other delivery companies have previously redeveloped entire mall sites into fulfillment centers. A mall is basically just a box on land — often, valuable, well-located land — so a mall can die, be demolished, and come back to life as something completely different. But the weak economy may mean an extended period before it makes sense to pursue that reincarnation.

Coronavirus Will Kill Lots of Malls