The Mall Is Not Dead

November 7, 2016

Traffic Is Down, but Malls Are Still a Fixture

Deep Dive: This is the first report in a three-part series in which Fung Global Retail & Technology analyzes the US mall landscape. 1) There are 1,221 malls in the US today, according to the The Mall Is International Council of Shopping Centers (ICSC). The number of malls increased by more than 300% from 1970 to 2015. Given Not Dead : the oversaturation of malls in the US, we believe that at least 30% of malls—mostly within the C and D classifications—need to be closed. Part 1 2) Malls classified as A properties are the most productive: they account for only 20% of all malls, yet represent 72% of total mall sales. 3) Even though retail traffic at malls has declined, retailers such as Tesla Motors and Apple are choosing to locate stores in malls in order to expose their brands to meaningful traffic. 4) The top 10 malls in the US see average sales per square foot of over $1,000. Four of these malls are located in Florida and two are in New Hampshire, which has no sales tax. Two are in tourist locations and two are outlet malls.

5) Other reports in this series will analyze department stores in DEBORAH WEINSWIG malls, trends impacting malls, malls’ evolution and store Managing Director , Fung Global Retail & Technology concepts that are expanding. [email protected] US: 646.839.7017 HK: 852.6119.1779 CN: 86.186.1420.3016

November 7, 2016

Table of Contents Executive Summary ...... 3 Malls Have Not Evolved Much Since the 1960s ...... 4 The Number of Malls Doubled from 1970 to 1980 ...... 7 Some of Today’s Retailers Were Founded in the 1800s ...... 8 Just 20% of Malls, the A Malls, Generate 72% of All Mall Sales ...... 11 To Increase Retail Sales at A Malls, 30% of Malls Should Be Closed ...... 12 Sales at A Malls Have Grown by Double Digits Since 2012 ...... 13 Mall Occupancy Rate Stabilizes at 94% ...... 14 Mall Traffic Still Meaningful Despite Declines ...... 15 Conversion Rates Are Higher Despite Drops in Traffic ...... 15 Number of Outlet Malls Has Increased by 47% over the Past 20 Years ...... 16 Conclusion ...... 17

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Executive Summary The mall is not dead. It is, however, evolving at a pivotal time in the context of a changing retail landscape and shifting consumer demand. The new mall is an exciting, hybrid format encompassing retail, entertainment, food, outlets, housing, education and even medical facilities, in some cases. Traditional mall tenants such as movie theaters and restaurants are returning to malls and newer tenants, including the likes of Tesla Motors and Apple, are choosing malls to expose their brands to meaningful traffic. Although traffic at malls has declined by 9.1% since January 2015, it is still significant—and conversion rates are increasing despite the drop in traffic. Furthermore, even though some stores have closed, many new ones are opening and creating hybrid formats that we have not seen in malls before. The number of malls in the US has grown by more than 300% over the last 45 years. The 1970s was the biggest period of growth, and the number of malls doubled during the decade. In the 1980s, shopping became an American pastime and malls became ingrained in our culture; they were featured in movies, songs and television shows. The megamall concept was developed in the 1980s and, in 1992, The Mall of America opened, featuring over 500 shops and three roller coasters. By the 1990s, mall growth had peaked and begun to slow; an average of 15 new malls were built every year in the 1990s compared with 25 in the 1980s. E-commerce also came onto the scene in the 1990s, and retail outlet stores started to gain momentum. The number of new mall openings has continued to decline since 2000, averaging just eight per year. The last enclosed mall was constructed in 2006, and the next planned enclosed mall is set to be built in Norwalk, Connecticut, over the next three years. Given the current oversaturation of malls in the US, we believe that at least 30% of them—mostly within the C and D classifications—need to be closed. Malls classified as A properties are the most productive; they account for only 20% of all malls, yet represent 72% of total mall sales. The top 10 malls in the US see average sales per square foot of over $1,000, which is more than twice the mall average. Sales at A malls have grown by double digits in the past five years, and most A malls are in urban or tourist areas. The retail outlet format has grown in popularity, and the number of outlet stores has risen by 47% over the past 20 years. Since 2012, 41 outlet centers have opened in North America and another 57 new outlets or expansions are set to open by 2018. Six outlets are planned to open in 2016. In this report, the first in our three-part The Mall Is Not Dead series, we analyze the US mall landscape. We review the history of malls in the US, as well as mall types, sales growth, retail occupancy rates, traffic and outlet malls. Other reports in this series will analyze department and specialty stores in malls, trends impacting malls, the evolution of malls, and store concepts that are expanding. Our research shows that the mall is not dead, but that it is transforming in order to accommodate shifts in consumer demand. In many cases, malls will need to repurpose their space to become hybrids or A malls in order to become relevant in today’s economy.

November 7, 2016

Malls Have Not Evolved Much Since the 1960s Victor Gruen, an architect and émigré from Vienna, Austria, is credited with inventing and opening the first US mall in 1956. He created the mall, in Edina, Victor Gruen developed the first Minnesota, southwest of Minneapolis, to be a civic center as much as a commercial center, with a day care, library, post office, community hall and art. US mall in 1956 in Minnesota. Gruen’s vision of the first mall was never fully realized: it was supposed to be the centerpiece of a 500-acre area that would include houses, apartments, office buildings, a medical center and schools. Author Malcolm Gladwell suggested that, as creator of the mall, Gruen was the most influential architect of the 20th century. In the 1960s, the economy was doing well, and strip malls became popular before larger malls became commonplace. The American consumer was introduced to branding, particularly in the grocery store, via ready-made meals, yogurts and desserts. Kellogg’s Pop-Tarts and Apple Jacks, General Mills Lucky Charms, Yoplait Yogurt, Campell’s Chunky soups, and Pringles potato chips were all introduced in the 1960s. The 1970s were a period of growth that saw the development of the festival mall format, which utilizes historical architecture and real estate and features local artists as tenants. Designed to revitalize an area, festival malls include Faneuil Hall in Boston, Station Square in Pittsburgh, Navy Pier in Chicago and Harborplace in Baltimore. The traditional American mall also started to gain popularity during the 1970s as Americans began to enjoy the convenience and pleasure of shopping at them. The number of regional malls grew by 130% over the 1970s.

Source: Shutterstock

The 1980s represented a great time for the American mall, and saw the The mall became a part of the development of the megamall format. A Gallup poll found that Americans American culture during the averaged approximately four trips per month to the mall during the 1980s. Hit pop songs such as “Valley Girl” specifically referenced malls, and teenagers 1980s. spent their free time hanging out at malls. There was a 42% increase in teen spending during the 1980s. The word “shopaholic” was coined, and shopping

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became an American pastime. Food courts were introduced and brands such as Orange Julius, Panda Express and Chick-fil-A became mall staples. Several warehouse clubs, including Costco, Sam’s Club and BJ’s, were also founded during the early 1980s. During the 1990s, malls reached peak popularity. The largest mall in the US, The Mall of America, in Bloomington, Minnesota, opened in 1992. It is home to three The first online secure purchases roller coasters and 500 shops and retail outlets. The 1990s also saw the occurred in the 1990s. introduction of the first secure online purchases, with the launch of Amazon in 1994 and eBay in 1995. In 2001, Apple opened its first mall store, and then opened more than 26 other stores in malls and urban shopping districts that same year. But malls seem to have started slipping in the mid-2000s. In 2006, the last enclosed mall was constructed. And, according to a 2009 Gallup poll, 29% of 17-year-olds reported that they rarely or never visited a mall, a sharp increase from 19% in 2003. As we celebrate the 60-year anniversary of the mall, the format of these shopping centers in the US is moving back toward Gruen’s original vision, and many malls are now becoming mixed-use, retailtainment centers.

Source: Shutterstock

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Figure 1. Mall History Timeline

Source: Fung Global Retail & Technology

November 7, 2016

The Number of Malls Doubled from 1970 to 1980 Over the past 45 years, the number of malls in the US has grown by 300%. According to the ICSC, there are currently 1,221 malls in the US versus just 305 The number of malls in the US in 1970. Malls gained popularity and more than doubled in number between has grown by 300% over the 1970 and 1980, from 305 to 707. From 1980 to 1990, mall growth continued at a past 45 years. rate of 36%, and there were 965 malls in the US in 1990. Growth slowed to 13% from 1990 to 2000 and fell to 10% from 2000 to 2010. Although the pace of mall development has slowed, the continued and consistent growth overall has created an abundance of malls in the US.

Figure 2. Number of Malls, 1970–2016

1,200

1,000

800

600

400

200 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Source: ICSC

Source: Shutterstock

November 7, 2016

The number of US malls has grown by 12% since 2000, according to the ICSC. The map below highlights mall growth over the past 16 years, by region. The Southeast region experienced the strongest growth, at 16%, followed by the Southwest region, at 13%.

Figure3. Growth in Number of Malls, by Region (2000–2016)

The Southeast has seen the highest growth in number of malls since 2000, at 16%, followed by the Southwest, at 13%.

Source: ICSC

Figure 4. Number of Malls, by Region (2000 vs. 2016) and % Change

Region 2000 2016 % Change Northeast 194 207 7% Northwest 67 73 9% Midwest 248 271 9% South-Central 107 120 12% Southwest 178 202 13% Southeast 300 348 16% Total 1,094 1,221 12% Source: ICSC

Some of Today’s Retailers Were Founded in the 1800s Below, we present a historical timeline of top retailers and industry influencers over the past 150-plus years. Five of today’s major US department stores were Five of today’s major US launched before 1910. Dillard’s and Dollar General were launched during the department stores were 1930s and the value store trend continued with H&M and Ross Stores entering launched before 1910. the market during the 1940s and 1950s, respectively. The 1960s paved the way

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for a new type of shopping as Walmart and Target entered the market and changed how we shop for brands. Home Depot launched in the 1970s along with discounter T.J. Maxx. Specialty retailers Gap and Sephora launched in 1969 and 1970, respectively, altering how we shop for denim and cosmetics.

The 1980s saw the introduction Most warehouse stores launched in the early 1980s. Two other major retail of J.Crew’s curated catalog and influences—the J.Crew catalog and QVC—also launched in the 1980s, and both QVC’s home-shopping network, affected patterns of shopping at home. both of which heavily influenced In 1994, Amazon.com was founded, and eBay launched the following year, how we shop at home. forever changing the world of online shopping. Lululemon Athletica and Under Armour launched in the 1990s, too, introducing us to a new world of sportswear and athleisure. Factory retail outlets also became very popular during the 1990s. The 2000s saw the continued evolution of online shopping, with retail-hosting websites such as Rue La La, Groupon and Gilt entering the market. The retail landscape has continued to evolve, and new modes of shopping, including consignment services, the sharing economy and subscription packages, emerged in 2010 and 2011 with the launch of The RealReal, Stitch Fix and Birchbox.

Source: Shutterstock

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Figure 5. Major Retailers and Influencers, 1800s–Today

Source: Company reports/National Retail Federation/Fung Global Retail & Technology

November 7, 2016

Just 20% of Malls, the A Malls, Generate 72% of All Mall Sales Malls are classified from A–D in the retail real estate industry, based on sales per square foot. The ICSC does not further classify its super-regional and regional malls by type, and there is no universally accepted method for calculating sales per square foot in the industry. Therefore, there may be some variation among There are approximately 550 B REITs on how each classifies A–D malls. and C malls in the US, but they As shown in the graphs below, 270 A malls constitute only 20% of the market, represent only 28% of all mall but they account for nearly 72% of all mall sales. By contrast, B and C malls sales. combined number approximately 550, but they represent only 28% of mall sales. Less than 80 D malls account for 0.2% of all mall sales.

Figure 6. Number of Malls, by Classification (2016)

180 160 140 120 100 80 60 40 20 0 A++ A+ A A- B+ B B- C+ C C- D Source: Green Street Advisors/Bloomberg A malls have experienced sales productivity increases of more than 10% over the past 10 years. Over the past 10 years, A malls have seen sales productivity increases of over 10%, whereas B and C malls have seen increases in only the low-to-mid single digits. According to commercial real estate group CoStar, sales per square foot at A+ malls have grown by more than 50% during the period.

Figure 7. Approximate Share of Total Mall Value, by Classification, 2016 (%)

0 A++ A+ A A- B+ B B- C+ C C- D

Source: Green Street Advisors/Bloomberg

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The table below shows Podell Real Estate Advisors’ regional mall classifications based on sales per square foot.

Figure 8. Regional Mall Classification, by Sales per Square Foot (2016)

A Malls Over $550

B Malls $400–$550

C Malls $325–$400

D Malls Under $325 Source: Podell Real Estate Advisors

Approximately 20% of the malls in the US are classified as A malls, 55% are B malls, and 25% are C and D malls. Fluctuations may exist among REIT portfolios depending upon individual REIT classifications of A–D malls.

Figure 9. Estimated Breakdown of Regional Malls, by Classification (2016)

C and D A Malls Approximately 20% of malls are Malls 20% 25% A malls, 55% are B malls, and 25% are C and D malls.

B Malls 55%

Source: Podell Real Estate Advisors

To Increase Retail Sales at A Malls, 30% of Malls Should Be Closed Sandeep Mathrani, CEO of General Growth Properties, stated at a recent industry conference that 30% of the retail real estate in the US should be eliminated in order to enhance a smaller-format experience and increase profitability. Ken Bernstein, President and CEO of Acadia Realty Trust, and Bill Lenehan, President and CEO of Four Corners Property Trust, agreed with Mathrani, and all Malls now encompass gyms, three noted that the selection of offerings within malls is shifting toward a more salons, restaurants and other well-rounded, lifestyle offering. Whereas malls formerly featured only retailers, forms of entertainment; even they now encompass gyms, salons, restaurants and other forms of theaters that previously left the entertainment; even theaters that previously left the malls are starting to malls are starting to return. return. Mathrani stated that the retail and shopping center industry has been overbuilt and that the ratio of retail square feet per capita has doubled in the US

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in the past 20 years. He said that only the fittest retailers will survive, and that those survivors will come out stronger and smarter.

Sales at A Malls Have Grown by Double Digits Since 2012 According to General Growth Properties, A malls have experienced double-digit sales growth since 2012. These malls’ sales have grown by 20% since 2012 in the most populated markets across the US: Atlanta, Boston, Chicago, Dallas, Since 2012, sales at A malls in 10 Houston, Los Angeles, Miami, New York, Philadelphia and Washington, DC. large US cities have grown by The top-performing malls usually are located in or near major urban or tourist 20%. areas. The table below shows the top 10 malls in the US by sales per square foot. Of these, four are located in Florida, two are located in tax-free New Hampshire, two are retail outlet malls and two are located in resort destinations (Las Vegas and Honolulu). Sales per square foot at Orlando’s Mall at Millenia—the mall ranked at the bottom of the list of 10—average $1,360, which is more than 2.5 times higher than the US mall average of $487. What differentiates top-performing malls from the average mall? It varies by mall. At some A malls, the addition of Apple and Tesla Motors as tenants has helped boost the malls’ success, given that these brands’ sales productivity is significantly higher than that of typical apparel and accessories retailers. Top-ranked Bal Harbour Shops in Florida is 50 years old, but the mall continually updates its stores and features the latest in luxury retail and high-end dining. Bal Harbour is anchored by Neiman Marcus and Saks Fifth Avenue, and its website New Yorkers and many tourists highlights its “social scene,” which includes designer benefits, fashion shows and take the bus to the Woodbury its fashion magazine. Common outlet mall, located 60 miles outside New York City. Its Fifth-ranked The Forum Shops at Caesars, Las Vegas has a spiral escalator, a uncommon retail tenants 50,000-gallon aquarium for exotic fish and talking statues as part of its Atlantis fountain show. The mall also offers a full range of shopping options, from include Prada, Celine and Dior, Versace and Salvatore Ferragamo to Gap and H&M. which help it rank among the top 10 outlet centers in the US. Mall operators and owners must reinvest, even in properties in good locations, in order to ensure their malls remain productive; otherwise, those properties will become obsolete.

Source: Shutterstock

November 7, 2016

Figure 10. Top 10 Malls, by Sales per Square Foot (2016)

Sales per Mall Location Square Foot

1 Bal Harbour Shops $3,070 Bal Harbour, FL

2 The Grove $2,140 Los Angeles, CA

3 The Mall at Rockingham Park $2,105 Salem, NH

4 Aventura Mall $1,642 Aventura, FL

5 The Forum Shops at Caesars $1,616 Las Vegas, NV

6 Woodbury Common Premium Outlets $1,550 Central Valley, NY

7 Pheasant Lane Mall $1,549 Nashua, NH

8 Ala Moana Center $1,400 Honolulu, HI

9 Orlando Premium Outlets $1,385 Orlando, FL

10 Mall at Millenia $1,360 Orlando, FL

Source: Fortune/CNBC

Mall Occupancy Rate Stabilizes at 94% The mall occupancy rate has been trending upward since The mall occupancy rate has been on an upward trend over the past five years, 2009, and has stabilized, at 94%, after hitting a low of 89% in 2009. The overall mall occupancy rate has been since September 2014. stabilized at 94% since September 2014.

Figure 11. Overall Mall Occupancy Rate, by Percent Leased (May 1987—May 2016)

86 87 90 93 96 99 02 05 08 11 14

Source: ICSC

November 7, 2016

Mall Traffic Still Meaningful Despite Declines Malls have seen an average traffic decrease of 9.1% since January 2015. Mall traffic has declined by 9.1% According to RetailNext, mall traffic in the US has decreased for 42 consecutive since January 2015. months and continues to be challenging. Higher-end malls have been less affected by the traffic decreases and, according to mall owners, productivity is up at these malls. Specifically, General Growth Properties reported that traffic at its malls was up 2% in 2015. Taubman Centers also reported elevated traffic in 2015. Traffic was flat at Simon Property Group’s malls in 2015, but same-store sales climbed by 5.7%, according to David Simon, Chairman and CEO. Simon Property Group holds 108 malls in its portfolio, totaling 122 million square feet.

Figure 12. Mall Traffic and Sales, by Month (YoY % Change)

(2)%

(4)%

(6)%

(8)%

(10)%

(12)%

(14)%

(16)% Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16

Sales Traﬃc

Source: ICSC

Although mall traffic may be lower than in prior years, it is still significant, and some companies are acting accordingly. Tesla Motors, for example, has been Although mall traffic is lower moving its showrooms into malls rather than to locations on the outskirts of than in prior years, it is still towns, because malls are where the traffic is. Restaurants located in mall significant. parking lots are moving inside the malls to be closer to foot traffic, whereas they had previously moved out of the malls. The theory that these restaurants are more convenient because they are located in parking lots has not proven to be the case.

Conversion Rates Are Higher Despite Drops in Traffic

Conversion rates have stayed Customers are converting more of their visits into purchases and, year over year, conversion rates have continued to increase despite the continuous drop in positive, and even increased, retail traffic. That means a greater proportion of store traffic is being converted despite drops in traffic. into sales.

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Macerich, a mall REIT, performed research on a cross section of its shopping centers and found that lower average expenditures and shorter trip durations were more than offset by increased frequency of visits and higher conversion rates.

Figure 13. Monthly Conversion Rate and In-Store Traffic at US Malls, YoY % Change

2.% 0.% (2)% (4)% (6)% (8)% (10)% (12)% (14)% (16)% Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016

Conversion Traﬃc

Source: ICSC

Number of Outlet Malls Has Increased by 47% over the Past 20 Years

Six outlet malls are set to open In 2015, there were 360 outlet malls in the US, compared with 245 in 1996, a 47% increase over the 20 years. The format continues to grow, and six outlet in the US in 2016. malls are proposed to open in 2016.

Figure 14. Number of Outlet Malls, 1970–2016

400

350

300

250

200

150

100

0 70 75 80 85 90 95 00 05 10 15

Source: ICSC

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In 2015, US outlet center sales averaged $546 per square foot, up from $532 in Since 2012, 41 outlet centers 2013, according to Value Retail News, the ICSC’s trade publication. Since 2012, have opened in North America 41 outlet centers have opened in North America and another 57 new outlets or and 57 new outlets or expansions are set to open by 2018. Factory outlet gross leasable space has expansions are set to open by increased by 32.8% since 2005, from 67 million square feet to 87 million square 2018. feet.

Conclusion Malls in the US grew in popularity and number over the second half of the last century, but they have seen declines in various metrics since the mid-2000s. There are now 1,221 malls in the US, and approximately one-third need to be closed due to oversaturation. Others will need to repurpose their space or work to become A malls, which are classified as the most productive. A malls have performed strongly, seeing double-digit sales growth in recent years. And many malls are already responding to changing consumer habits by offering new, hybrid retail formats and services designed to boost traffic and conversion. Although mall traffic is declining, it is still considerable. Retailers such as Tesla Motors and Apple are moving into malls to take advantage of the shopping centers’ footfall, and even theaters and restaurants that previously left the malls are starting to return. In addition, the popular outlet mall format continues to grow and six new outlet malls are set to open in the US by the end of this year. So, although malls are facing necessary transformation given the current retail landscape and shifting consumer demand, the mall is definitely not dead.

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Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 [email protected]

Shoshana Pollack Senior Research Associate

Erin Schmidt Research Associate

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