Retail real estate in the United States, an outlook on the shopping malls

  • Rise of e-commerce and closure of retail chains in the United States
  • Future outlook of shopping malls in the nation


There is speculation that the retail real estate industry in the United States is in danger owing to the growth of online shopping. In the last few decades, the idea of malls, which has its seeds in the US and became a trend of modern retail has expanded across the world. But at present malls are no longer a prime consideration for shopping as e-commerce has come into existence. The development in the delivery system from 4 to 5 days to 2 days or the very next day has been a significant cause for this change and is also one of the reasons for the closure of retail stores for various companies. Toys “R” Us, Bon-Ton, Sears and Sam's Club are some players that could not adapt to the sudden changes and faced losses. This also led to a decline in the profitability of the retail property developers and operators.

The shopping malls in the US are showing signs of a slowdown in the past few years due to an increasing market share of the online sales and the increasing popularity of off-price stores located outside malls. The e-commerce sales in the US were USD 409.2 billion in 2017 and is expected to grow at CAGR of 10.2% to USD 603.4 billion by 2021.

Currently, the US has 1,200 plus shopping malls and these have grown substantially since 1956.  The US has 23.6 sq. ft. of mall space per person followed by 16.4 sq. ft. per person in Canada and 4.6 sq. ft. per person in the United Kingdom. The per capita retail space in malls is already in excess as compared to other developed countries. According to the International Council of Shopping Centers, on an average 7.20% of the total space in the US is vacant due to the closure of department stores.

A Credit Suisse Report has predicted that 25% of the shopping malls will be out of the business owing to the expansion of the e-commerce. Being a consumer-driven business, reacting to the demands of different groups is very important for shopping malls. Many malls are refurbishing by adding or improving food, and are offering more entertainment choices and are converting their existing spaces to non-retail. The current trends show that malls with hybrid composition and those that are offering beyond traditional shopping such as food and entertainment, automobiles, education as well as medical services are doing well. The location also matters for malls, and the ones located in prime or tourist location and offering diversified products are expected to sustain for a long time.

International Council of Shopping Centers (ICSC) has classified its member malls into various categories such as ‘A’, ‘B’, ‘C’ and ‘D’, this is based on the sales per square foot and according to the ICSC malls classified as ‘A’ are most productive as these consist of only 20% of the malls in the US and account for 72% of the industry sales.

The below chart shows the revenues of the leading retail property developers in the US.

The revenues of the Simon Property Group, the largest company in the retail real estate industry, which owns 107 malls has increased by 12.52% from USD 6,288.51 million (2014) to USD 7,075.91 million (2017), with 98% occupancy rate. Further, the revenue for the DDR Corp. has decreased by 8.37% in 2017 as compared to 2016 due to the closure of various Toys “R” Us stores as the retailer went bankrupt. However, this vacant space will fill up as cinemas and food chains, making a comeback to these malls, and giants like Apple and Tesla are also looking to open their stores.

The financial data of the industry also shows that the condition of malls is satisfactory as shown below through the chart. The operating revenue per square foot of the industry has increased by 7.17% from $26.23 (2015) to $28.11 (2017). On the other hand, the net operating income (NOI) per square foot of the industry has increased by 7.24% from $17.82 (2015) to $19.10 (2017). However, the operating revenue and NOI for Q2 2018 was flat as compared to Q1 2018.

Moreover, after hitting a low of 89% in the year 2009, the occupancy rate of the industry has remained similar in the year 2017 as compared to 2015, followed by a slight increase in 2016. This is despite a decreased traffic in malls since 2015, the malls categorised as ‘A’ were less affected as they remodelled their spaces for non-retail purposes. The average occupancy rate of ‘A’ grade malls has remained higher than 97.5%. The category B malls account for 50% of the total malls in the US, whereas categories C and D together account for 30% of the total malls in the nation.

Televisory is of the opinion that the category ‘A’ and ‘B’ malls will stay, whereas category ‘C’ and ‘D’ malls will fall prey to the changing trends and to the rise of online shopping.

In conclusion, it can be stated that the outlook for the mall industry will remain intact at least in the medium-term. However, less productive malls may shut due to technological advancements and growth of e-commerce. Thus, by offering better shopping experience, flexible products at competitive prices and converting vacant spaces to non-retail, the retail real estate industry can survive for long and is expected to do better in the coming years.

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