The Covid-19 pandemic dramatically accelerated new models of retail ownership and leasing for national retailers and their landlords.
Between the growth of demand in e-commerce and the waning interest of consumers to visit stores in person, retail was already struggling in the years prior to the pandemic. More than 9,000 brick-and-mortar stores closed in 2019 and roughly 40% of the country’s department stores have been shuttered since 2016.
The pandemic sped up this metamorphosis of the retail industry. Over 12,000 stores were closed in 2020, 30% more than the year before. As a result of the shift from in-person shopping towards digital shopping, those retailers who who were not adapting to changing trends efficiently or quickly enough struggled most and were left behind.
For example, Francesca’s, a women’s apparel and accessories retailer, struggled pre-pandemic and filed for bankruptcy because it was too far behind popular retail trends, only launching its first mobile app at the end of 2020.
But these changes also spurred mall owners to take a greater interest in their tenants’ operations.
The Role of Mall Owners in Retail Bankruptcies
Since the start of the pandemic, certain major mall owners such as Simon Property Group, partnering with Authentic Brands Group, a brand management company, and Brookfield Property Partners have been taking the future of the shopping mall into their own hands, not only to capitalize on those undervalued assets but to shore up the stability of their own malls.
When brands like Brooks Brothers, J.C. Penney, and Lucky Brands filed for bankruptcy in 2020, mall owners became stalking-horse bidders for the companies and provided financing throughout the bankruptcy proceedings, changing the dynamic between mall owners and retailer-tenants. Mall owners have become more involved in rescuing individual retailers out of bankruptcy in order to not only make a profit on their investments, but also to otherwise ensure the financial security and occupancy of their own malls.
This new tactic of purchasing retailers preceded the pandemic, however: In 2016, when Aéropostale, a retailer of teen apparel and accessories filed for bankruptcy, mall owners took a risk and purchased the assets of the company.
This experiment proved to be a worthy investment; as reported, the purchase was successful and the mall owners were able to generate revenue and returns on their investment. This purchase created the model that has resulted in a new symbiotic relationship between the mall owner-landlord and the retailer-tenant.
This strategy has been mimicked on a grander scale in the dire circumstances created by the pandemic with the hopes that not only will the mall-owners save the retailers but also they will stall, or at least decelerate, the deterioration of the traditional shopping mall.
Exceptions to the Trend
It is important to note, though, that mall owners are not making investments in all struggling retailers. With respect to those retailers that mall owners do not believe are valuable or imperative to the stability of their malls, mall owners are not
as open to finding creative solutions, but instead are seeking to enforce their rights under their existing lease agreements.
For instance, they often do not provide as flexible or generous rent concessions and abatements as compared to those provided to retailers viewed as valuable. They are instead insisting either their default be cured and the lease be assumed, or the lease be rejected and the premise vacated
Mall owners are keeping a close eye on retailers to evaluate their value and their necessity to both the shopping centers and the mall owners’ portfolios. The mall owners are not only considering the impact on individual malls, but the effect on their overall portfolio.
This tactic affords mall owners with a great power to hand-select the make-up of companies that will continue to exist not only in their own shopping centers but also in the landscape of the retail industry generally. This will also create an interesting competitive environment in the malls—how can a retailer not owned by a mall effectively compete with a retailer owned by its landlord?
Analysts who are looking forward are predicting that the concept of the traditional mall is fading and will be redefined into mixed-use spaces with commercial, residential, and entertainment aspects.
Some owners have already added health care and educational facilities to their shopping centers. Further, Amazon is currently working with mall owners to convert vacant malls into distribution centers to keep up with digital shopping demands.
As a result of the pandemic, the gradual transformation of the suburban mall may have been accelerated by a decade or more. These changes may only be beginning but they are here to stay. There is a new interplay between mall owners as the landlords and retailers as their tenants.
We do not know where such a transformation will conclude, but clearly, changes will continue. Mall owners are becoming much more diversified through such investments and that in and of itself will create an entirely new paradigm in the future of the shopping mall and retail industry.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Mark Indelicato is the managing partner of Thompson Coburn Hahn & Hessen in New York. He represents parties in insolvencies, bankruptcies, and out-of-court workouts, including secured and unsecured creditors, official and ad hoc committees, trustees, debtors and purchasers of assets in Chapter 11 cases.