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Fung Global: Malls Don’t Seem to be Dead at All

Turns out, malls aren’t dead after all. Some are just in critical condition.

In a recent report, Fung Global Retail & Technology said traffic may be down, but malls are still a fixture in retail.

“The mall is not dead. It is, however, evolving at a pivotal time in the context of a changing retail landscape and shifting consumer demand,” the report noted. “The new mall is an exciting, hybrid format encompassing retail, entertainment, food, outlets, housing, education and even medical facilities, in some cases.”

Right now, there are 1,221 malls in the U.S., according to the International Council of Shopping Centers (ICSC), and that is a 300-fold increase from 1970. The number of new mall openings has already been on the decline since 2000, averaging just eight each year. But because of the still present oversaturation, Fung Global said at least 30 percent of malls need to be closed.

Most of those malls that should be shuttered are the less productive C and D class malls, as the higher end, more productive A class malls account for only 20 percent of the overall mall count but make up 72 percent of sales.

“Sales at A malls have grown by double digits in the past five years, and most A malls are in urban tourist areas,” Fung Global said. “In many cases, malls will need to repurpose their space to become hybrids or A malls in order to become relevant in today’s economy.”

Sales at A malls have grown 20 percent since 2012

Since 2012, sales at higher-end malls have grown by 20 percent, according to General Growth Properties, and malls in markets like Atlanta, Chicago, Los Angeles, Miami, New York and Washington, D.C., have done the best.

Of the top 10 malls in the U.S. by sales per square foot, four are located in Florida, two in tax-free New Hampshire, two are outlet malls and two are located in resort destinations Las Vegas and Honolulu. Orlando’s Mall at Millenia (ranked tenth of the top 10) had $1,360 in average sales per square foot, more than 2.5 times higher that the national mall average of $487.

“Mall operators and owners must reinvest, even in properties in good locations, in order to ensure their malls remain productive; otherwise, those properties will become obsolete,” according to Fung Global.

Mall traffic is still meaningful, despite declines

Citing RetailNext, Fung Global said mall traffic has seen an average decrease of 9.1% since January 2015—or 42 straight months.

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The higher-end malls haven’t been affected as much, with productivity even inching up at some of them.

“Although mall traffic may be lower than in prior years, it is still significant, and some companies are acting accordingly,” Fung Global said.

Tesla Motors, for one, has moved its showrooms into malls to benefit from the traffic and restaurants that were once situated in mall parking lots are moving inside to be closer to the traffic.

Conversion rates have also been higher even though traffic hasn’t.

“Customers are converting more of their visits into purchases and, year over year, conversion rates have continued to increase despite the continuous drop in retail traffic,” Fung Global said. “That means a greater portion of store traffic is being converted into sales.”

Looking at a cross section of its own malls, mall real estate investment trust (REIT) Macerich, found that lower average spend and shorter trips were offset by more frequent visits and higher conversion rates.

There’s hope for malls yet

If underperforming malls get shuttered and the platform’s footprint comes down to a more reasonable size, malls can still be profitable retail outlets—provided they can be turned into to more interesting places to shop.

“Although mall traffic is declining, it is still considerable. Retailers such as Tesla Motors and Apple are moving into malls to take advantage of the shopping centers’ footfall, and even theaters and restaurants that previously left the malls are starting to return. In addition, the popular outlet mall format continues to grow and six new outlet malls are set to open in the U.S. by the end of this year,” Fung Global said. “So, although malls are facing necessary transformation given the current retail landscape and shifting consumer demand, the mall is definitely not dead.”