American Consequences - December 2017

From Stansberry’s Investment Advisory



T housands of malls were built in the 1960s and 1970s, and while the architecture could differ from city to city, the format was basically the same... The original suburban mall was designed to showcase department-store tenants. When Younkers, Hutzler’s, and Miller & Rhoads opened mall locations, they became the property’s prized possessions. You couldn’t operate a successful mall without large department stores “anchoring” each end. People came to the malls for the anchor stores, and the traffic these stores generated sustained the other smaller retailers, known as “inline” tenants. The inline retail stores generate the traffic. The department stores are increasingly a place for busy shoppers to cut through on the way to the parking lot. Furthermore, the Internet helps shoppers find exactly what they want before they go to the mall. They no longer need to browse in large department stores and get the help of department-store employees to make decisions. Large department stores like Sears and JC Penney have been shutting down their weaker stores for years. That’s not news. But until recently, store closings have plodded along at a moderate pace, and mall operators have been able to replace their lost anchor tenants with smaller retailers and innovative reconfigurations (more on that in a moment). That model has now flipped...

The traditional enclosed-mall design is dead. Not that everyone knows it yet. At a time when many brick-and-mortar retailers are either closing stores or going out of business, debt-ridden mall operator GGP (GGP) is building a new mall... The company expects the $525 million mall in Norwalk, Connecticut to open in 2019, with Nordstrom and Bloomingdale’s as its anchors. The move shows that GGP is behind the times. Only six large malls were built in the decade ending 2015... compared with 54 in the previous decade. These days, developers are generally only interested in building places like The Grove in Los Angeles, a 575,000-square-foot outdoor marketplace dotted with art-deco style architecture and a lot of open spaces. For “traditional” malls to survive, they need to commit to massive capital investments to transform the vacant space left by the disappearing store anchors. When an anchor store leaves, something else has to replace it. And we must admit, the mall operators – particularly Simon Property Group (SPG) – have done better than we expected filling these retail holes. These redevelopments have included health clubs, call centers, movie theaters, restaurants, and even subdivided inline space. They’ve handled these closures well, at least so far. This might just be the last mall ever built.

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