Cautious optimism. That seemed to be the sentiment among the mall property owners who hosted earnings calls last week.
The positive mood was due in part to swift Christmas sales, which have led to a less eventful start to the year than 2017 brought us. The executives also seemed to feel better positioned to handle what may come thanks to diversified portfolios and redevelopment plans that will pivot them out of dicey sectors (read: apparel) and into areas that could afford them built-in traffic.
“We are feeling better about the environment,” said CFO and Treasurer Simon Leopold. Taubman Centers, citing the strong holiday. Even with that however, he said the company knows there are still potential challenges ahead. “We are certainly not assuming that we’re out of the woods yet.”
The company cited Aerie, Uniqlo, Athleta and Madewell among its top performers. CEO Robert Taubman sees “encouraging momentum” from the leasing trends, which include luxury players like Brunello Cucinelli, Louis Vuitton and MCM taking more space and brands like Warby Parker, Kendra Scott, Untuckit and Amazon joining the mix.
The mall group is retaining its defensive posture, keeping an eye on tenants who seem to be on the bubble and stockpiling reserves in anticipation of potential bankruptcies or store closures. “That watch list is smaller than it was a year ago by a meaningful amount,” Leopold said, adding that the company’s exposure remains high in some cases. “And obviously that makes you feel better as well but there’s still tenants that we have a significant number of stores in our portfolio but we feel we’re prepared for it.”
Like all other property managers, CBL spent last year managing the fallout from bankruptcies and so-called rightsizing, which included 433,000 square feet of space in the fourth quarter resulting from Gymboree and Crazy 8 closures.
Despite those challenges, the holidays were definitely a bright spot, which CEO Stephen Lebovitz hopes will spark more movement in the right direction. “The overall retail environment is more positive at this time compared to last year,” he said. “We expect ongoing pressure this year as some close stores, right size rents or choose to reorganize.”
He noted improvement in one much-maligned sector. “A lot of the narrative last year about department stores going away has really subsided,” he said. Lebovitz called out J.C. Penney in particular as an example of “a real positive story” thanks to its willingness to test new product categories and invest in its stores. While he said the Sears saga speaks for itself, others in the CBL portfolio like Dillard’s and Macy’s are proving that it’s too soon to write department stores off. “Department stores are an important aspect of our mix.”
Even so, Lebovitz credits the company’s diversified tenant roster for the uptick in consumer visits. In 2017, CBL made a conscious effort to attract non-apparel businesses like entertainment entities like Dave & Busters, workout studios like Planet Fitness and eating establishments like Panera. “As a result of these strategies, 75 percent of our total new leasing in 2017 was executed with non-apparel tenants,” he said. Further, as CBL embarks on redeveloping some properties, it will convert some space to mixed use with hotel and multifamily homes.
Though apparel sales outpaced total sales in general at its properties, GGP also intends to restrict the number of clothing stores it signs going forward. The company is moving in more movie theaters, co-working spaces, gyms and supermarkets.
“Traditionally, we have leased about 50 percent to apparel. Again reducing our exposure to apparel, we leased only 40 percent in 2017 to apparel,” said GGP CEO Sandeep Mathrani. “I do believe that again our trend should be 35 percent to 40 percent in 2018.”