While both property owners and tenants can probably agree that malls are at a crossroads, the recent report, FTI Consulting Retail Real Estate Beat, shows that’s just about where the consensus between the two parties ends.
The report, which quizzed 90 U.S.-based retailers and 30 of the biggest retail REITs, mall owners and shopping center landlords about how they view the mall shopping environment today and where they think it’s going it the future, reveals a sharp divide on key issues like the importance of brick-and-mortar stores today, what makes a positive shopping experience and the impact of mobile.
Though the narrative that retail is facing an apocalyptic end has gotten a lot of traction this year, the reality is only 13 percent of mall operators are below their planned occupancy rates, with 26 percent above.
That could be in part due to a trend that sees malls pulling back on apparel and shoe stores in favor of restaurants. Over the next three years, the report found, landlords expect their reliance on specialty stores in the former category to dip from 20.2% today to 18.8% and department stores to go from 14.3% of their square footage to 13 percent. At the same time, eateries are expected to grow to 17.3% from 14.7%. Other than a slight uptick in the toys, hobby and sporting goods spaces, no other category is anticipated to fluctuate.
These findings align with the Q3 reports from the real estate industry. For instance, apparel constitutes 5 percent of the new leases Weingarten Realty’s signed in the the last year while food service and restaurants comprise 24 percent. Further, only 25 percent of real estate investment trust company GGP’s new deals for 2018 are for apparel stores.
It should come as no surprise that retailers are looking to e- and m-commerce for growth. In three years, store execs expect e-commerce (no matter if its via desktops, tablets, etc) to make up 23.6% of sales, a leap from 16.1% today. As a result, they think store sales will go from 83.4% of sales today to 76.1% during the same period.
This contraction in store sales explains why retailers are less bullish on brick and mortar than landlords. More than 90 percent of property owners see physical stores as critical to retailers’ growth, while only 61 percent of retailers share that sentiment. When it comes to stores’ role in brand identity, the two have found more common ground with 87 percent of landlords and 76 percent of tenants saying the box is critical.
Even given landlords’ strong belief in the need for stores, 60 percent of them admit that foot traffic is down compared to only 37 percent of their tenants.
When it comes to who’s shopping in stores and what they’re looking for, other contrasting views were revealed. Seventy-three percent of retailers are convinced shoppers want in-store experiences while only 33 percent of property managers agree. Further, the vast majority (93 percent) of landlords don’t seem challenged by attracting young shoppers while 22 percent of store executives identify this as a problem area.
The divide in their attitudes continued when it comes to mall services and flexibility.
‘Landlords and retailers have similar top priorities for brick and mortar stores: location, design and parking,” the report found. “However, landlords overestimate the importance of these basics to their tenants—while underestimating the importance of flexible store configuration and lease terms.”
When looking at how landlords plan to promote their tenants in three years, some tactics will stay pretty much status quo like traditional advertising efforts and upkeep of the physical spaces but there are big changes in some areas. For instance, 97 percent of landlords intend to use social media and mobile in the future vs the 57 percent who do so today. Further, 97 percent will focus on adding innovative store concepts, up from the 87 percent who focus on that today.
One example is The Edit, an incubator of sorts for online retailers looking to debut physical stores, which Simon Property is using to woo digitally native brands. The retail group is also among others that work with Appear Here, a service that matches brands with pop-up retail space.
Overall, landlords are more worried about the e-commerce threat than retailers with 80 percent of the former saying it will have the greatest impact on the industry in three years and only 54 percent of the latter.
During their third quarter earnings calls, executives noted they’re keeping a sharp eye on their tenant mix with this in mind. Weingarten considers 80 percent of its tenants to be internet resistant, including off-price apparel, supermarkets and restaurants, while Realty Income characterizes 97 percent of its portfolio as protected from e-commerce and economic downturns.
At 47 percent, malls also report being more concerned with the demands omnichannel is placing on supply chain systems than retailers (28 percent). That’s in spite of the fact that stores report having a host of new tools in the works related to inventory management, tying online purchases and returns to store and pricing.