NEW YORK CITY—For the leading owners in the retail sector, 2014 has been upbeat thus far. The five mall REITs rated by Barclays Capital—Simon Property Group, GGP, Pennsylvania Real Estate Investment Trust, Macerich Co. and CBL & Associates—are up an average of 14.5% year to date, compared to 14.1% for the MSCI US REIT Index. Occupancy is high at nearly 95% and, following a rough winter, sales have been trending upward. For these landlords, the ability to replace underperforming tenants is greater, as is their pricing power.
That being said, Barclays continues to rate the sector as “neutral,” and reports this week from a variety of sources cite both challenges and opportunities for shopping center landlords. In its latest National Retail Review, for example, Cassidy Turley notes the “surprising performance” of power centers despite the plans of many big-box chains to shrink footprints, store counts or both. The reason for this strength boils down to one word, says Cassidy Turley: adaptation. Barclays notes that omni-channel initiatives being implemented by the most successful retailers are being facilitated by landlords that offer same-day delivery “while getting the real estate benefit,” especially in class A malls.
“Smart landlords have been willing to spend the money to demise large vacant boxes into smaller (and more leasable) boxes,” according to Cassidy Turley’s report. “But perhaps more importantly, forward thinking landlords have increasingly repositioned these centers by actively courting food users to backfill space left behind by shrinking bookstore, office supply, computer electronics and other chains in contraction mode.”
By shifting their emphasis “away from big box hard goods retailers with regional draws and towards grocers with neighborhood draws, many centers have successfully weathered the trend of shrinking big boxes and, in some cases, have successfully boosted traffic and sales in their centers,” the report states. “But there is no doubt that many of these centers no longer fit the traditional profile of what we used to define as power centers.”
Accordingly, Cassidy Turley says it has reclassified many of these erstwhile power centers as community centers, thus shrinking the inventory of power centers it tracks by about 8.2 million square feet. Among the properties that it continues to classify as power centers, vacancy has declined from 6.2% at the end of 2013 to 5.9% as of this past March 31.
Outside the universe of class A properties, says Fitch Ratings, “a flurry of in-line tenant store closures” could further undermine some malls that are already underperforming, especially those in tertiary locations. The ratings agency notes that store closures aren’t likely to make a significant impact on the performance of Fitch-rated CMBS transactions.
“The majority of the store closing announcements made thus far in 2014 are associated with smaller sized tenants, with the exception of Macy*s and JC Penney,” according to Fitch. “The smaller sized tenants should not have a significant impact on overall mall occupancy, although mall operators in tertiary locations (those not in major or secondary markets) will have the hardest time re-tenanting space.”
Store closings and the challenges of re-tenanting remain a challenge for mall owners, Cassidy Turley says. The underlying causes: the advent of e-commerce and, perhaps less widely recognized, “the challenge of the missing middle class consumer. Though the rise of e-commerce has probably emerged in the public mind as a greater threat to bricks-and-mortar retail, it is this second trend that is causing the most damage currently. This is particularly impacting malls.”