Shifting Consumer Behavior Forces Evolution of the Mall

• Malls today have evolved to meet changes in consumer behavior, and it seems another phase of the mall’s evolution is upon us.
• Retailers are accelerating their digital strategies to keep up with the boom in e-commerce and the changing nature of consumer demand.
• Gordon Brothers agrees with the industry-wide belief that some of these pandemic-accelerated shifts are here to stay.
• While the pandemic accelerated the department store industry’s struggle, retailers that were once unable to enter class A malls or shopping centers are now being welcomed by landlords.
• Like traditional e-commerce, which quickly became the preferred shopping channel for millions of consumers during the pandemic, buy online, pick up in store and curbside options are here to stay.
• Additionally, it’s likely more fulfillment of online orders will occur at the store level and continue to transform brick-and-mortar stores to mini distribution centers to keep up with the accelerated shift in e-commerce.
• The only constant is change, and five areas are critical to shape the future of the mall.

Gone are the days when malls were the center of American life where teenagers would hangout and busy shoppers could purchase clothes, cosmetics, music, electronics and gifts from shops in the mall, a neon-lined town square.

Malls in their 1980s and 1990s heydays are viewed through today’s lens as points of nostalgia. Despite the mall’s fall from the height of pop-culture and the decline in the number of brick-and-mortar stores over the last two decades, malls today have evolved to meet changes in consumer behavior. They are still considered a destination because they offer amenities, experiences and entertainment to enhance the consumer’s shopping experience. Most are anchored by department stores and include restaurants, bars, cinemas and fitness centers.

And it seems another phase of the mall’s evolution is upon us. Mandated closures, capacity limitations, social distancing measures, supply chain issues and shipping delays that resulted from the ongoing COVID-19 pandemic accelerated many industry changes already underway. As relief efforts have ramped up, vacant anchors have even been repurposed as temporary state-run vaccination sites.

Many mall owners are looking for ways to maintain relevancy in the “new normal.” Retailers are accelerating their digital strategies to keep up with the boom in e-commerce and changing nature of consumer demand.

Gordon Brothers agrees with the industry-wide belief that some of these pandemic-accelerated shifts are here to stay. We foresee a pent-up demand for a return to department stores, restaurants, theaters, gyms and back to school shopping. Additionally, demand for formal wear could increase with the prospective return of weddings, celebrations and graduations, which have all taken a hit the past year.

For those in the retail, banking, lending and restructuring industries, an understanding of the retailers most exposed to shifting consumer trends, store closures and ongoing leasing trends can help identify risks and opportunities in the marketplace.

The ongoing pandemic altered the brick-and-mortar landscape and retail destinations reeled from closures and decreased consumer foot traffic in 2020. Despite already declining sales trends, the pandemic accelerated the department store industry’s struggle, and annual revenue declined 14.4% year over year in 2020. ^[1]

Before the start of the pandemic, some high-end malls, or A-rated malls, were performing well. However, department stores were classified as non-essential businesses and forced to shutter during the pandemic while operators contended with delayed or canceled orders and employee layoffs. As a result, mall vacancies reached their highest rate in 20 years increasing 0.3% to 10.1% in the third quarter of 2020. ^[2]

More than 11,000 stores closed in the U.S. in 2020, a record that could be broken again in 2021.^[3]  Although an economic recovery is expected to take several years, commercial real estate also takes time to evolve because of long-term leases. A typical retail term is about six years and offices are closer to 10 years.

Tom Pedulla President, Real Estate at Gordon Brothers sees a silver lining. With the sharp increase in store closings, retailers that were once unable to enter class A malls or shopping centers are now being welcomed by landlords. Additionally, landlords are now willing to work with these retailers to expand their footprint, creating opportunities that may not have existed before the pandemic.

The retail industry was upended as the virus spread, forcing store closures and the shift to e-commerce, which quickly became the preferred shopping channel for millions of consumers. E-commerce sales in the U.S. skyrocketed, growing 44.5%, 36.6% and 32.1% for the second, third and fourth quarters of 2020, respectively, over 2019.^[4]

E-commerce sales even exceeded holiday expectations while brick-and-mortar sales lagged behind. Online holiday shopping increased 32.2% in 2020 over 2019, according to Adobe Analytics.^[5]  The early start to the holiday season provided an additional boost after a year of unprecedented growth and could represent a longer-term shift.

In addition to traditional e-commerce, new delivery alternatives like buy online, pick up in store and curbside options are here to stay. Gordon Brothers has even seen a greater willingness to experiment with other technology-driven trends like virtual shopping. Some of our high-end jewelry clients have made investments in video camera systems and lighting so they can virtually show jewelry to clients. In many cases, this has allowed them to not miss a beat from a revenue perspective.

The continued growth of e-commerce, in addition to off price and value retailers will continue in a post-pandemic world. As retailers continue to work through unprecedented supply chain congestion, an early arrival of the holiday season with online promotions will likely continue going forward to mitigate ongoing shipping and inventory fluctuations.

Additionally, the e-commerce channel is now more important than ever when we reappraise these retailers. Asset-based lenders may need to reappraise shortly after stores can fully reopen as more individuals are vaccinated and herd immunity is reached, as has been the case in certain regions.

To keep up with the accelerated shift to e-commerce, it’s likely more fulfillment of online orders will occur at the store level. To properly meet the needs of its customers, retailers will continue to transform brick-and-mortar stores to mini distribution centers. Distressed malls and vacant anchor spaces could attract companies such as Amazon and FedEx that could repurpose the empty spaces for micro-fulfillment.

However, flipping the model from commercial to industrial will require the properties to be rezoned, which may be met with resistance from residents. Complicating matters, lease kick-out clauses could be triggered if two or more mall anchors are vacant, and fulfilment centers may not qualify to solve for this vacancy.

Kick-out clauses can be devastating to mall owners, creating a domino effect whereby an anchor tenant closes, or total occupancy falls below a certain threshold, and in-line retailers can seek rent concessions or break leases entirely. These clauses may be part of the reasoning behind mall landlords investing in retailers.

Other ideas to repurpose mall spaces include offices, housing, health care facilities or community colleges. While general retail and apparel tenants have struggled, necessity-based retail like grocery stores and experiential retail like restaurants and fitness centers are faring much better. Transforming struggling retail spaces into offices, schools, fitness or medical centers can create engaging experiences to attract the needed foot traffic that enables physical locations to thrive.

As more individuals receive COVID-19 vaccines, top-tier shopping centers can bounce back. Malls that were struggling to stay open before the pandemic may shutter more quickly, as shoppers bypass them for destinations offering a more upscale experience or simply choose to shop online.

The shopping mall was initially created as a destination community center for those who settled in U.S. suburbs during the second half of the twentieth century to come together to shop and interact socially.^[6] Since the pandemic has interfered with both human connection and shared spaces, malls could come full circle and once again offer both to consumers.

Gordon Brothers believes certain areas are critical to shape the future of the mall.

Safety and convenience: Concern for health and safety during the pandemic is taking business away from physical stores. Consumers are less confident about visiting enclosed malls. However, in some of our latest work within the mall retail space we have seen a reversal of this trend, which could be a result of pent-up demand or sheer pandemic fatigue.

Purpose: Large-footprint stores need to repurpose to stay relevant. Lower-performing retailers should focus their capital on more profitable or flagship locations, which allows them to strengthen their brand through both the physical store and online channels.

Food: Focus has shifted from fast-fashion to food as consumers have become increasingly more conscious about its environmental effects. Food choices may drive demand and create new reasons for customers to visit malls. Strong food and beverage options increase the amount of time a consumer spends in a mall, which increases value for other tenants.

Technology: Retailers who are not using digital tools available to engage with customers will likely not survive. Increasingly, a shift to e-commerce and brand revitalization are viable options for struggling retailers even after brick-and-mortar locations close.

Location: For daily essentials like grocery stores and pharmacies, consumers increasingly prefer one-stop shop destinations. Local neighborhood centers or strip malls are most convenient for meeting daily, functional needs.

The pandemic has shone a bright light on the operations of malls and retailers, exposing weaknesses that continue to alter the retail status quo and accelerate industry trends globally.

While the past year brought unprecedented uncertainty, complexity and change to the retail industry, the pandemic will continue to shape the year ahead. Retailers and those in the retail industry will continue to evaluate and evolve their business models, reduce costs and adjust to the increased power of the consumer.

While no one can predict the future, there are key considerations for the future of retail in a post-COVID-19 world. Malls are not going to vanish entirely anytime soon, but they could be different for both owners and occupants.