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Ripple Effect: Anchor Shutdowns Hurt Surrounding Stores

Posted by Mary Barbour on April 2, 2017

In part one of this series on the impact of large retailer closings, we discussed the recent rise in large retailer closings. J.C. Penney announced the closing of 138 stores last month, for example.  When these large operations shut down, it can have a ripple effect on the shopping center as a whole and on the smaller, individual stores around them.  After Montgomery Ward declared bankruptcy and closed its last 250 stores in 2000, roughly 33% of the shopping malls where it operated closed down, according to Credit Suisse analysts.

Increased Closings Across the Nation

Shopping centers have traditionally been dominated by departments stores, but an increasing number of shopping centers are losing anchor tenants like Macy's, J.C. Penney and Sears. Mall developers have inevitably had to test a variety of concepts to maintain foot traffic for the remaining tenants.  Sometimes these are discount retailers, entertainment complexes, grocery stores or even spas and fitness centers. Basically, shopping malls are in a crisis period.  Without suitable replacements, co-tenancy clauses in the standard lease trigger lower rents or even early termination of leases that have the commercial real estate community in crisis.  

Mall Traffic Trends_RBC Capital Markets.pngAccording to the Richmond Times Dispatch, Sears has closed 152 mall stores since 2007 and Macy's planned to close 40 of its 770 stores last year. These closures have a large impact on stores in the middle of the mall as well.  Brands like The Limited, Abercrombie & Fitch, the Gap and Victoria's Secret will feel further pressure in already hard times.

Consumer shopping habits have changed and budget-conscious consumers are opting for ecommerce. Mobile shopping has changed they dynamic of the mall experience with customers having the full assortment of a given brand available at their fingertips. Further, omnichannel commerce has changed the practical requirements of retail space as stores are expected to help fulfill online orders.  Retailers will shift to smaller footprints in strategically located areas that can add efficiency to inventory and logistics.

Impact of Closing on Other Stores

Consumers still want to see and touch merchandise while maintaining the social experience that shopping that malls provide. However, because the U.S. has about 3 times the amount of retail space per square foot of any other country, industry experts believe that there are simply too many department stores to align with actual consumer demand. The combination of online shopping convenience with the prevalence of discount stores like Target and Walmart make it difficult for traditional department stores to compete.  So it's not likely that new tenants are going to be lining up to fill these large vacancies. 

Malls are in a slow decline. Some will be completely redeveloped with a combination of retail, housing and offices all in the same area. Others will transition completely into medical facilities, colleges, churches, parks or some other type of facelift. We're likely to see higher end shopping malls getting the most amenities and re-investment from developers, while malls in less affluent neighborhoods suffer or shutdown.  

Far-Reaching Impact

The decline of the mall is a prospect that many governments and communities are having to face across the nation. This loss of jobs and tax revenue will have far-reaching impacts on infrastructure investment, education and public safety. Next week we will take a deeper look at what the impact of these large store closings will have on local economies and communities.

 

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Topics: Retail, Malls, shopping, Bankruptcy, Economy, Macy's, J.C. Penney, Abercrombie & Fitch, The Gap, Victoria's Secret

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