The recent dominance of online retailers like Amazon.com, combined with dismal department store sales figures, seems to suggest the suburban shopping mall’s days are numbered.
A confluence of factors is driving this trend. For years, the financial health of large department stores has been deteriorating largely due to the growing popularity of online shopping.
While weak department store sales are nothing new, there’s increasing concern about economic contagion affecting malls in general. Wall Street traders have placed bets on the failures of mall owners and operators and widespread defaults on commercial real estate debt.
Is the mall, an American icon, truly doomed? Or, to quote another American icon, are reports of its demise greatly exaggerated? The truth is a bit more nuanced.
The typical suburban mall begins life with a plot of land bought by a commercial real estate developer or real estate investment trust (REIT). While the mall is under construction, the developer must acquire tenants such as department stores and other retailers, who sign long-term leases.
A typical shopping mall features one or more anchor stores and dozens of smaller retailers. Anchors are usually famous department stores such as Nordstrom, Sears, or Macy’s that serve as the headline tenants that attract consumer traffic to the mall.
The importance of anchor stores cannot be overstated. They not only pull in the most customers, but their presence also affects the fortunes of all other stores within the mall and serves as a major draw for other retail tenants to lease adjacent spaces.
Department Store Closures
U.S. department store sales have been going down for more than a decade. Annual department store sales have declined from $232 billion in 2000 to $155 billion in 2016, a drop of 33 percent, according to U.S. census data.
Several major department chains announced massive store closures in 2017. As many as 324 department stores, representing 36 million square feet of space, will become vacant this year, according to Chicago-based real estate consultancy JLL. The biggest department store companies announcing closures are Macy’s Inc., J.C. Penney Co. Inc., and Sears Holdings Corp.
The impact on Sears has been severe. In a March filing with the U.S. Securities and Exchange Commission, Sears raised “substantial doubt” regarding its “ability to continue as a going concern.” In other words, the company publicly expressed doubt about its future as a viable company. Sears has aggressively closed retail locations—both of its subsidiary Kmart and its namesake stores—and sold off valuable assets, such as the Craftsman hardware brand.
