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Business Observer Friday, Apr. 24, 2015 3 years ago

Malls maligned

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Online shopping and changing demographics are denting mid-level retail hubs, which are making changes of their own to survive.
by: Kevin McQuaid Commercial Real Estate Editor

Executive Summary
Industry. Retail Trend. Older malls face more competition Key. Mid-level malls have to reinvent themselves to attract shoppers.

Octavio Ortiz has little to worry about — at least in terms of positioning — at the Mall at University Town Center.

The $315 million mall, which debuted last October, is fresh, luxurious and dotted with tenants such as Saks Fifth Avenue, Apple, Michael Kors Lifestyle and a host of upscale restaurants such as The Capital Grille.

“Because half the mall's tenants are new to the market — and 100% of the restaurants — it's helped gain local acceptance,” Ortiz says.

Many Gulf Coast malls haven't been so fortunate. Older malls find themselves saddled with anchors and inline merchants that consumers no longer favor, such as Sears and J.C. Penney, retailers that contribute to a spreading stagnation that's hard to turn around.

“Most mid-level malls, they're really facing trouble,” says Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail consultant and investment banking firm. Davidowitz says a shrinking middle class means malls face more competition from cost-conscious shoppers seeking out discount stores like Target and Walmart.

“And guess what?” he says. “None of them are at the mall.”

Mid-market woes
Along the Gulf Coast of Florida, such change has impacted mid-level malls such as Desoto Square in Bradenton; the Clearwater Mall in Clearwater; the Seminole Mall in Pinellas County; and to an extent Westfield Countryside and Westfield Southgate Mall. To counter the trend, mall owners are shuffling tenant mixes, adding unorthodox uses and converting space to new concepts.

“Middle-market malls, like Brandon Town Center, for instance, there's some risk associated with them going forward, because they've been populated with anchor tenants like Sears that have struggled,” says Patrick Berman, senior director of retail brokerage services at commercial real estate firm Cushman & Wakefield, in Tampa. “Most people today are looking for discounts and value.”

The phenomenon isn't limited to Florida, either. When developers Taubman Centers Inc. and Benderson Development Co. completed University Town Center last year, it was the lone new regional, enclosed shopping mall to open in the United States.

It's a trend likely to continue, despite notable exceptions like the planned “American Dream Miami” mall, a $4 billion, 200-acre mixed-use complex, which Mall of America owner Triple Five Worldwide Group of Cos. hopes to develop in South Florida as a companion to a property it built outside New York City.

“The days of new mall development are gone,” says Barry Seidel, president of American Property Group of Sarasota Inc., a Sarasota commercial brokerage firm that specializes in retail sales and leasing. He says this is especially true in Southwest Florida, which he believes is saturated with malls.

“Could someone build another mall in this area?” Seidel says. “No. There are a lot of choices now for consumers, and I don't know if there are enough patrons to sustain the rents that most malls have to command now.”

Although mall rents at mid-line properties run around $25 per square foot, and can be double that figure when common area charges are included, rents can be as much as $125 per square foot for prime space at upscale malls like University Town Center, Berman notes.

Even so, vacancy rates for area malls - at least in Sarasota and Manatee counties - have been falling amid an improved economy. Overall vacancies dropped from 7.8% in the two counties' malls during the first quarter of 2013 to 4.9% during the same period this year, according to real estate research firm CoStar Group. Vacancy rates have fluctuated throughout the Gulf Coast, though have mostly held steady, CoStar notes.

One place that showcases the struggling mid-market trend, however, is Westfield Corp.'s Sarasota Square Mall, a one-time regional leader that has been supplanted by competition and the loss of key tenants such as Dillard's.

Although the mall landed discount giant Costco Wholesale Club a few years ago, today, the roughly 1 million-square-foot mall has prominent vacancies, though Westfield declined to provide specific figures for any of its properties.

Seidel says Sarasota Square is problematic because even though Costco is doing well, its customers don't go to the mall; they go to Costco and then head home. “There's no reason to go there,” he says.

Exacerbating the problem, Seidel notes, two of the mall's anchors have been struggling in recent years - Sears and J.C. Penney.

But new anchors - especially top quality department stores - appear to be backing away from traditional brick-and-mortar offerings.

Nordstrom, for instance, has plans for just a trio of new stores in Florida, according to the Seattle-based company's website, and all three will carry the Nordstrom Rack discount banner.

Rethinking Retail
Still, midline mall operators are working to buck the trend with new tenant mixes and other efforts.

At Desoto Square in Manatee County, the mall's general manager, Robert Tackett, looks to replace Macy's after it left for University Town Center in October. He says the key to competition is finding the right tenant mix for the area's demographics.

“Our key objective right now is to fill that Macy's space,” Tackett says. “Once we do that, everything else can fall into place.”

Tackett believes that the mall, which is about 20% vacant according to CoStar, would be an ideal site for Costco, Belk's or any number of other retailers.

DeSoto Square isn't the only mall in the region working to upgrade or reinvent itself to remain competitive, however.

Westfield is updating a handful of its malls in the area. At its Westfield Countryside property, in Clearwater, it's adding a Nordstrom Rack discount store, which will join a new Whole Foods Market.

The Australian-based mall owner also plans to bring in Michael Kors to the former Brandon Town Center and apparel retailer H&M and Paul Mitchell School to Westfield Citrus Park.

But it has put the most investment into its Southgate Mall, where the company says it has spent $8 million on renovations, and planned improvements will include a new CineBistro movie theater to replace the departed Saks, along with stores like Abercrombie & Fitch in an attempt to convert the mall into a “lifestyle” center that features restaurants and entertainment alongside traditional retailers.

In all, more than a dozen storefronts are currently vacant there, spots that once were occupied by restaurant Ziti, Dillard's, Williams-Sonoma, and others before University Town Center debuted and dented the mall's 100% occupancy.

“The best is yet to come,” reads a sign inside Southgate where Pottery Barn once operated. “Style in Progress,” says another that covers an empty storefront.
Some malls never recover, though.

In Tampa, owners of the former East Lake Square Mall abandoned retail altogether. Today, Netpark Tampa Bay is a nearly 1 million-square-foot office complex. A similar fate met the former Tampa Bay Mall; it was taken over by the Tampa Bay Buccaneers and turned into a training and practice facility for the NFL football team.

The Clearwater Mall, after suffering for years, was razed in the late 1990s and St. Petersburg-based Sembler Co. turned it into a series of freestanding big-box discount or warehouse stores measuring as much as 600,000 square feet combined.

“It was an enclosed dinosaur,” Cushman & Wakefield's Berman says. “It had a great location, but the wrong tenant base. Shoppers went to newer, nicer malls. Now it's extremely successful.”

Competing with fortresses
Berman contends lower-end mall operators may have to turn to alternative tenants - think electronics and appliance discounter HH Gregg, Walmart or LA Fitness - to shore up vacancies and breathe new life into their properties.

“There are basically two types of malls: Class A properties like International Plaza and University Town Center — we call them fortress malls because they can't be assaulted — and everyone else,” Berman says.

Davidowitz agrees.

“The guys aiming at the bottom of the retail food chain and those at the top are doing well,” he says. “But not those in the middle. The department store business is not growing, and that's the heart and soul of the mall, and as such, the bottom line is no one is building new malls — you don't have to be a rocket scientist to figure out why.”

And like Berman, Davidowitz believes some malls will have to turn to non-traditional tenants like health care clinics to survive.

For now, at least, Ortiz knows his mall is enjoying a honeymoon period helped by its Interstate 75 location and surrounding retailers.

“Our reach goes from St. Petersburg to Fort Myers. Location is key,” he says. “And there's a lot of synergy with other retailers nearby, so we're really a destination if one is not directly from this area.”

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