Department Store Closings Offer Unique Opportunities as Retail Property Market Aligns with Changing Consumer Demands
While some consumers might think the rise of online shopping and a wave of department store closings in the retail property market signals the imminent demise of the shopping center as we know it, those in the know see it as a once-in-a-generation opportunity.
According to a new JLL report, more than 300 department stores are closing this year, putting about 36 million square feet of vacant space back on the market. Some mall operators are seizing the opportunity, taking advantage of changing consumer demographics like rising urbanization and evolving preferences for a shopping “experience.” With that, shoppers should expect to see more restaurants, entertainment venues, grocery stores and even other department stores as operators transition properties.
But how? In the U.S., nearly half of shopping malls gross leasable area (GLA) is devoted to department stores. The answer is that the retail space is not oversupplied, it is under repurposed. With empty stores on the horizon, mall owners are actively looking to transform anchor space and it’s paying off. Historically, rents paid by department stores have been extremely low – often less than $10 per square foot. As they become vacant, owners have a new opportunity to re-tenant the space and increase revenue.
Take for example Seritage Growth Properties, which has 266 properties originally leased to Sears Holdings. It’s now redeveloping and re-leasing space originally held by Sears and Kmart stores to new tenants. Sears was paying on average about $4.40-per-square-foot across the portfolio. But through repurposing and creatively rethinking about space, Seritage has attracted new tenants who pay on average $18.55-per-square-foot. That’s 4.4 times the previous rental rate. As of March 2017, apparel tenants, restaurants and entertainment venues have made up nearly two-thirds of the new leases.
Further, several large-format retail concepts are fitting well into former department-store locations:
1. I’ll Have What She’s Having
Traditional mall food courts were designed merely as pit stops for consumers to quickly refuel and get back to shopping. But today, restaurants are becoming destinations, and anchors in their own right. The Galleria in Houston is adding a Nobu and Fig & Olive that will occupy a portion of what was once Saks Fifth Avenue. At King of Prussia Mall in suburban Philadelphia, Outback Steakhouseand Yard House have leased part of a former Sears.
2. Supermarket Sweep
While you’d be hard-pressed to find many supermarkets in enclosed malls 10 years ago, consumer expectations are changing. According to a GGP 2017 survey, nearly 50 percent of mall shoppers indicated they would like to see a grocer in their local mall. Wegmans, in fact, will soon be taking over a 194,000-square-foot JC Penney footprint at GGP’s Natick Mall in Massachusetts. The grocer will occupy 125,000 square feet and sublet the remaining space.
3. Bigger Than the Silver Screen
Along with dining, entertainment tenants are playing a bigger role in shopping centers. A growing number of theaters are moving into former department store space. AMC Theaters will occupy a former Saks Fifth Avenue space at The Shops at Riverside in Hackensack, New Jersey and a Harkins Theaters recently opened in a former Nordstrom space at Los Cerritos Center in Southern California. It’s not just theaters on consumer’s wish lists. Concepts like Main Event Entertainment and Dave and Busters offer bowling, laser tag, arcade games and karaoke.
The retail real estate market is undergoing a rapid transformation, and as consumer trends continue to evolve, the industry is well positioned for growth by taking advantage of these changes.
View the full report, Empty to Alive: The Next Use for Department Store Space Report, here.