What Simon's Attempted Purchase of Macerich Foretells About Retail Real Estate

For now, Simon's attempt to buy Macerich has gone from front page news to a footnote in history.  Both companies have beautiful properties across the US, as is expected for  the largest and third largest shopping mall owners.  There is a much broader issue raised by this event: incorporating other uses of traditional retail property.

Park Meadows, Lone Tree, CO (© 2015 Hoffman Strategy Group)

Park Meadows, Lone Tree, CO (© 2015 Hoffman Strategy Group)

In Robbie Whelan's March 10, 2015 Wall Street Journal article, Simon Property Bids for Macerich, and Rich Shoppers, he points out that:

  • 193 malls were built in each decade from 1960's to 2009
  • Nine have been built since 2010
  • Only two major malls are currently under construction
  • Roughly 165 of the 1,100 or so malls will either close or be repurposed in next 20 years

Without question, shopping centers and malls will continue to draw shoppers even in our more advancing digital age.  For example, Park Meadows (a GGP property) in Lone Tree, CO, is a 19-year old regional mall anchored by Dillard's, JCPenney, Macy's, and Nordstrom.  Specialty retailers like the Apple Store, Crate & Barrel, Hanna Andersson, Janie and Jack, the recently opened L.L. Bean, and Sundance offer a complementary merchandising mix.  The tenant mix appeals to upper middle income, professional, college-educated, and digitally-savvy households.

The tenants, tenant mix, and land uses at existing retail properties need to evolve with, if not ahead of, the underlying changes in consumer demand components to remain viable over the next 25 years.  GGP has done this well with Park Meadows, which is 98 percent leased.

Two structural shifts occur in the economy that impact retail real estate:

  • Consumer lifestyles change with each generation causing national retailers that fail to evolve to fall out of fashion: Montgomery Ward, Sears, and JCPenney.
  • Populations migrate: to the suburbs for the period late 1950's to mid-1990's; to master planned communities on the exurban edge from late-1990's to the Great Recession of 2008-09 (e.g., Lone Tree, CO); and to the Renaissance in downtown retail and integral use projects (2011 to today).

For example, 30 minutes north of Park Meadows, the Westminster Mall closed after 34 years in 2011 because of the first structural shift.  This regional mall with over 1.0 million square feet of retail was shuttered when Montgomery Ward, an anchor tenant along with JCPenney, Sears, Dillard's, Macy's and Mervyn's, went broke.  Then Mervyn's filed for bankruptcy and closed; which led to Macy's departure from the mall.  The City of Westminster purchased the property in 2011 and is in the process of redeveloping the site into a new mixed use downtown.

Bannister Mall in Kansas City is an example of what happens when the population shifts.  Development of new malls followed the Kansas City's population migration to the western suburbs of Leawood, Overland Park, and Shawnee, KS, at the expense of Bannister Mall.  The anchors of JCPenney, Dillard's, The Jones Store, and Sears started to close during the period of 2000 to 2006.

Market shifts associated with these structural changes are difficult, not impossible, to predict.  Simon, GGP, Macerich, and others have navigated many millions of square feet through these changes to remain viable.  One way to ensure viability is by integrating other uses, asset types, in with the retail; for example, residential, office, medical, hotel, and entertainment.  

In the context of forecasted structural changes in the retail industry and the generational lifestyle shift from Baby-boomers to Millennials, we will see more of this type of repurposing of shopping mall properties alongside the growing commercial development activity of smaller footprint retail and integral use projects throughout cities (i.e., urban infill, central business districts, downtowns, and corridors).  

 

Jerry L. Hoffman

Hoffman Strategy Group LLC, 4424 Hallcliffe Road, Lincoln, NE, 68516, United States

Jerry L. Hoffman is owner of Hoffman Strategy Group LLC, a firm nationally known for strategic development, economic analysis, and market location consultancy.