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Malls Experienced a “Broad Based’ Improvement in First Half

After a period of doom and gloom, the outlook at the mall is looking brighter.

Carrying forward with a sentiment that began at the end of Q1, shopping center owners say retail is trending in the right direction. In addition to increased demand and improved sales, commercial real estate executives also pointed to tailwinds created by the tax reform bill and online sales tax decision.

As the CEO of one of the largest open-air shopping companies, James Taylor of Brixmor can attest to the positive swing the industry has felt in 2018.

“We’re seeing a much higher level of demand then we expected coming into the year,” he said, during the company’s earnings call. “Overall, the leasing environment [is] much more positive even than what we saw eight to 10 months ago.”

Brian Finnegan, Brixmor’s EVP of leasing, points to the new TJX Homesense concept as an example of the forward trajectory. “Retailers were not only continuing with their store opening plans, but coming out with new formats,” he said. In addition to grocers, which anchor 70 percent of its properties, the company counts TJ Maxx, Dollar Tree and Walmart among its biggest tenants.

At Taubman Centers, the turnaround thus far this year has been “broad based.”

“It’s not a handful of categories. It’s the vast majority of categories are doing well,” CEO and chairman Robert Taubman told analysts recently. Taubman counts apparel stores like Forever 21, Madewell, Uniqlo, Zara, Athleta and J. Jill among the center’s top performers. By category, women’s shoes and jewelry were up 18 percent, only outpaced by electronics at 20 percent. The CEO was particularly enthusiastic about the luxury space, which he categorized as “very strong.” In addition to the performances by Louis Vuitton, Fendi and Saint Laurent, he said Gucci outperformed its overall 40-percent sales increase for the first half in Taubman properties.

While many of these exclusive brands are expanding, Taubman is seeing growth on the other end of the spectrum, too. “There is this big transition where you’re seeing the fast fashion guys take significant space and own a customer segment in a way that we really haven’t had one or two or three tenants do in the past,” he said.

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Taubman Centers, which operates 27 retail locations including the Beverly Center in Los Angeles and The Mall at Short Hills in New Jersey, has also seen interest from digitally native brands like Warby Parker, Fabletics, Untuckit and Boll & Branch.

This so-called “screens to stores” movement, is helping drive both leasing and rents, according to Acadia Realty president and CEO Ken Bernstein. The real estate investment trust operates retail space in key areas like New York’s SoHo district, Michigan Avenue in Chicago and the Georgetown area of Washington, D.C.

“From a retailer’s perspective, here is the difference between 2017 conversation and 2018. In 2017, far too many of our retailers of all different stripes were frozen,” he said. “Fast forward to 2018, and some of our well-known names are back on offense. They’re disciplined about rents, but they’re ready to sign leases.”

Bernstein attributes a lot of the positive trend to the economy, saying retailers are no longer “looking over their shoulder, not second guessing whether or not rents will be cheaper in six months from now.”

Simon Properties, which is the recognized leading mall owner with just under 200 retail destinations in the U.S., is growing with between 50 to 60 retailers that are either new or growing e-commerce companies as well as international chains expanding to this market.

“They all want consumers [and] the right cotenancy so to speak…and who the owner of their real estate is is important to them to some degree,” said Simon Property chairman and CEO David Simon.

Kimco Realty, which owns more than 450 open-air shopping centers in across the U.S., has seen growing interest from a variety of sectors, including off-price and dollar stores, which made up 11 percent of the company’s new leases at the close of the first quarter, along with restaurants and entertainment businesses at 21 percent and services including health clubs and salons at 28 percent.

Conor Flynn, CEO of Kimco, said two factors have had a big positive impact on retail this year. “In numerous meetings with our retail partners, they have consistently touted tax reform as a major factor in the real estate expansion plans,” he said.

Simon Leopold, EVP and CFO of Taubman, credits the tax cuts with creating a “wealth effect.” And David Simon said the legislation gave the growing economy a boost, which retailers are using to their advantage. “A number of our retailers are getting better and healthier,” he said. “And I think the tax cut on their business gave them more earnings to invest or replenish their merchandise.”

In addition to the tax break, Flynn said retailers received another boon from Washington in the form of the Supreme Court ruling, which opened to door to states looking to collect sales taxes from any business processing transactions locally even if they don’t have physical presence there. Echoing many in the retail community, he said the decision closes the “loophole” that gave e-commerce retailers an unfair advantage over their brick-and-mortar counterparts. “We believe the ruling can potentially accelerate the trend of omnichannel retailing,” he said.