Blackstone, the world’s largest real estate investor, has warned that the outlook for America’s enclosed shopping malls is darkening quicker than experts expected as the growing online retail threat hammers their valuations.
More than 10 per cent of US retail sales are transacted online, according to Credit Suisse, forcing big chains to shutter thousands of stores in recent years. Retailers have announced plans to close 76m square feet of store space already this year, according to CoStar, a data provider, almost as much as that announced in the whole of 2016.
Retail woes are intensifying pressures on shopping malls, especially of the lower-end “enclosed” type in smaller American cities and towns, where tenants are moving out or demanding lower rents. The enclosed mall is the classic indoor commercial hub that emerged in the 1950s, rather than the malls built around an anchor grocery chain or department store.
“The retail industry is clearly facing headwinds. And it’s the first time we’ve seen secular rather than cyclical headwinds,” said Nadeem Meghji, head of North American real estate at Blackstone. “We’re now seeing pressures even on luxury retailers, which I didn’t expect to happen as fast as it has.”
The market for second-tier enclosed malls has virtually frozen given how concerned investors are, but Mr Meghji estimated that in the past two years prices may have plunged as much as 40 per cent on average for the 1,100 enclosed regional malls in the US. Even for the top 50, prices have probably declined by 20 per cent, the Blackstone executive said.
The private equity firm’s $102bn real estate arm still owns some grocery shop-anchored malls in high-density population areas, but no longer has any exposure to the enclosed shopping mall sector.
“The internet has made the value proposition for a lot of shopping malls less relevant,” Mr Meghji said. “If you add in the factor that they actually tend to have higher operating costs due to security, electricity and so on, then they are high-cost rental spaces for retailers.”
However, Greg Maloney, chief executive for Americas retail at JLL, the real estate investment and management company, said the “doom and gloom” was overdone, pointing out that a retail property can be converted to alternative uses such as housing. He argued that overbuilding is the central challenge rather than internet shopping.
“People say the internet killed bricks-and-mortar retailers. But bricks and mortar killed itself,” he said. “People say they don’t know how we’ll survive, but we do it by adapting.”
Yet concerns about the march of online retailing are mounting in most parts of the retail industry. Sears, the department store chain founded in 1886, is emblematic of the challenges. In March it warned there was “substantial doubt” over its ability to continue operating, and its Canadian subsidiary filed for bankruptcy last month.
The US company managed to steady its shares with a fierce cost-cutting drive this year but many investors expect it to fall by the wayside. Given Sears’ long pedigree, that could deepen investor pessimism surrounding the industry, according to Larry Perkins, head of SierraConstellation Partners, a restructuring firm.
“The big names mark the tipping points, and everyone is now looking at Sears as it is such a marque name,” he said. “Its cultural significance is disproportionate, given its legacy and history.”