Monday 18 December 2017

American mall owners in hard sell as online grows

American shopping malls are coming under increasing pressure as online sales continue to grow
American shopping malls are coming under increasing pressure as online sales continue to grow

Sarah Mulholland

Retailers and shopping- centre owners are gathering in Las Vegas this week prepared to send a message: The demise of the American mall has been greatly exaggerated. Or, in the language of the moment, it's fake news - mostly.

It's a hard story to sell. Store closures are accelerating, stocks are sinking and investors are speculating which struggling chains might be next to file for bankruptcy, while consumers buy more and more of what they need online.

But industry executives attending the International Council of Shopping Centers' annual convention, the industry's biggest, insist that perception is overly pessimistic and that the bricks-and-mortar business is healthy enough to weather the storm.

"We're trying to arm our people with facts so that when the questions are asked, we can say 'no, actually, these are the facts'," said Greg Maloney, chief executive officer of retail at brokerage Jones Lang LaSalle Inc.

Those facts include a trend of property owners re-leasing many stores, in advance of closures and bankruptcies, for more profitable uses such as food and entertainment venues, according to Maloney. Another sign that things aren't all bad: For retail properties in large cities across the US, the vacancy rate held at 4.9pc in the first quarter, near the lowest level of the past decade, data from JLL and CoStar Group Inc. show.

Still, the pressures are real, and the industry's woes are on everyone's minds in Vegas, where 37,000 attendees - from merchants to property brokers, developers and landlords - are expected to swarm the convention centre for sessions on topics like how to draft a lease and the advent of food halls. There will be some tough conversations too, as mall owners search for the right formula to combat declining foot traffic and make their properties internet-proof.

Every major US department store - from JC Penney Co. to Nordstrom Inc. - reported disappointing first-quarter sales.

JC Penney is shutting down about 140 locations, while Macy's Inc., the industry leader, is closing 100 stores and cutting about 4,000 jobs on top of 6,200 layoffs announced in January.

Department stores aren't the only ones struggling to adapt in the age of Amazon Prime. Rue21 Inc., a teen-apparel chain controlled by private equity firm Apax Partners, last week became the latest retailer to file for Chapter 11 bankruptcy, following a string of similar defaults this year.

Landlords are facing the prospect of a rising tide of vacancies as even healthy merchants find that they don't need as many stores.

Maloney isn't in denial about the problems. "We know that it's not the greatest environment right now," he said. "We don't want people to think we have our heads in the sand."

There are pockets of optimism amid the gloom. Stephen Lebovitz, CEO of CBL & Associates Inc., a Chattanooga, Tennessee-based mall operator with 128 properties, said he's focused on finding better uses for empty space left by failing retailers.

GGP Inc. is also among landlords looking for ways to Amazon-proof their malls by replacing closing stores with businesses that offer experiences shoppers can't get online. CEO Sandeep Mathrani is working to open the first KidZania activity centres in the US, and his company is teaming with fast-fashion chain Forever 21 to roll out Riley Rose, a line of boutiques aimed at millennials.

Investors, however, are wary that it may not be as easy to fill all the empty space as property owners contend. Shares of real estate investment trusts that own and manage malls are down 13pc this year, compared with an index of all Reits that's up 1.5pc.

Even giants like Simon Property Group Inc. and GGP, which own some of the most profitable high-end malls in the United States, aren't immune to concerns that the retail shakeout will keep spreading. Mathrani said on a conference call with analysts this month that the company is considering strategic alternatives to help boost its stock price.

"The clouds over bricks-and-mortar retail have been darkening throughout '17," Jim Sullivan, president of the advisory group at property researcher Green Street Advisors LLC, said in an email. "A key question for stock market investors is whether those fears are overly discounted in today's share prices, particularly for retailers that are weathering the storm, as well as for the Reits that own high-quality malls and shopping centres."

Value-oriented investors are monitoring the turmoil for opportunities to profit.

Marathon Asset Management's Bruce Richards said in an interview last week that his distressed-debt firm is prepared to swoop in once high-yield retailer bonds fall further.

He cited a "shopping list" with slumping chains such as Sears and J. Crew, calling them good candidates for bankruptcy.

Marc Lasry, CEO of Avenue Capital Management, said retailer stocks offer good value now, while it's still early on the debt side.

Meanwhile, Lebovitz, of CBL & Associates, will be meeting with a wide range of retailers in Las Vegas, from Tesla Inc. and Apple Inc. to Hot Topic, a music-themed apparel merchant, and Dick's Sporting Goods.

Also on his list of retailers to talk to: Amazon.

(Bloomberg)

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