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How Open-Air Shopping Centers Are Sidestepping the Mall Meltdown

Record store closures and bankruptcies have plagued the industry this year—and spawned a slew of headlines proclaiming the end of retail. But some property owners are unfairly being lumped into the doom and gloom narrative.

“Most headlines revolve around the challenges that most malls are experiencing and department stores are experiencing,” said Christopher Conlon, executive vice president and COO of Acadia Realty. “The street retail and suburban non-malls are doing OK. There are spots of greatness.”

Open-air shopping centers and urban street retail report a definite difference between perception and reality. They credit the location and visibility of their properties, the diversity of their tenant mix, and the draw of their anchors for their better performance. And despite online retail’s destabilizing effect on the mall, they say they have reason to see e-commerce as more of a friend than a foe.

Tenant tactics

One of the main things differentiating these shopping areas from their mall cousins is a conspicuous absence of apparel.

Weingarten Realty Investors, for instance, has very little in the way of apparel tenants. The company operates 216 shopping centers, most of which are anchored by supermarkets and feature basic goods and services tenants, a direction it charted after 2008. As a result, Drew Alexander, president and CEO, said Weingarten’s portfolio primarily includes places like phone stores, pet stores, Subway restaurants, day spas and yoga studios.

While the company’s tenants also include recently bankrupt retailers like Payless, Rue 21, Gymboree and Alfred Angelo, these apparel and footwear tenants only comprise 33 locations or six tenths of 1 percent of the company’s annual base rent, EVP and COO Johnny Hendrix said during Weingarten’s most recent earnings call.

And Weingarten isn’t the only property owner pivoting away from apparel stores. GGP, which operates malls and open-air properties, has also been reducing its exposure in this sector. “Over the last five years, the composition of our portfolio has evolved away from apparel. The non-traditional retail uses of entertainment, restaurants, car showrooms, fitness and grocery have increasingly become a large part of our business,” CEO and director Sandeep Mathrani said. Mathrani added that apparel represents about 25 percent of the new leases for 2017, bringing apparel down from 50 percent to 41 percent of the mix.

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[Read more about the current retail landscape: Simon Property Group CEO: The Apocalypse Narrative is All Wrong]

The one area of apparel these operators aren’t trying to distance themselves from is off price. These stores don’t just do well within their four walls, they also act as a draw, bringing consumers into shopping centers on a regular basis. While Macy’s, J.C. Penney, Dillard’s and The Bon-Ton all reported decreases in their second quarter comp sales, Ross was up 4 percent, TJX 3 percent and Burlington 3.5%.

“As consumer habits have shifted in apparel and home goods, the notion of treasure hunting has become important, which has benefitted Ross, TJX and Burlington. That has outperformed the balance of apparel,” Conlon said. “The only other area that’s hot is fast fashion.”

And looking at the results of a recent International Council of Shopping Centers survey, consumers’ preference for these types of retailers makes sense. The ICSC found that price and value rank as the top factors in brand loyalty for 92 percent of shoppers, beating out other characteristics like quality (79 percent) and selection (71 percent).

Ultimately, promise of something new coupled with a good deal equals frequent trips and steady foot traffic.

E-commerce alliance

Repeated traffic is also the reason grocery stores are an important part of the open-air shopping mix.

Kimco Realty has specifically focused on grocery-anchored shopping centers because food shopping draws consumers in multiple times a week. “Open air is satisfying that last mile,” said EVP and COO David Jamieson. “We’re embedded in the fabric of the community.”

And like the service-oriented tenants that have increased in popularity since the recession, supermarkets have proven to be relatively e-commerce proof.

Online grocery sales only represented 1.4% of the overall grocery market at the end of 2016 in the U.S., according to Cushman & Wakefield’s MarketBeat U.S. Shopping Center Q2 2017 report. Due to costs of home delivery related to perishables, the firm says stores are the best option for last-mile delivery.

Alexander of Weingarten said the likely direction for online grocery sales is click and collect given the already skinny margins supermarkets earn. “I believe that in the majority of the U.S., you can’t deliver groceries for free profitably,” he said, adding this will affect the long-term prospects for online grocery shopping with home delivery. “There will be a point where people will have to pay, and behavior changes when they have to pay.”

If he’s right and shoppers opt to pick up their online grocery orders, there will be little disruption for shopping centers like his. In fact, linking online sales to existing store fleets is helping to boost foot traffic and sales in struggling mall-based stores already. Further, online pureplays are recognizing there’s an advantage to having brick-and-mortar locations. “We get really excited that e-commerce is no longer a threat. It’s a part of the strategy,” Conlon said.

Conlon cites a list of e-commerce companies that are now putting down roots in shopping centers like his, including Warby Parker eyewear, furniture retailer Joybird and apparel brand Untuckit. These retailers are discovering what others already know, he said. “Street stores are critical brand builders.”

They’re also a more economical option. Conlon said rents in his properties are less than just the triple net charges at malls, which include taxes, insurance and maintenance. “Our rents are helpful to tenants’ profitability,” he said.

Both Conlon and Jamieson agree that Amazon’s interest in Whole Foods stems from its need to get closer to the consumer. “The fact that they bought a grocery store with hundreds of locations means there is value in having a brick and mortar presence,” Jamieson said.

Put simply, Conlon added, “It validated our business overnight.”