Retail Landlords: Malls Doing Well Despite Online Sales

By Kris Hudson

In spite of the rapid rise in online sales that have hurt a number of national retailers, the biggest shopping-mall companies are doing quite well, thank you.

That was the counterintuitive message delivered Tuesday by several chief executives of leading retail property owners at International Strategy & Investments real estate conference. ISI, an investment research firm, held its annual conference at the St. Regis Hotel in Manhattan. The CEOs argued that, despite challenges facing individual retailers, many real estate investment trusts that own retail property are posting occupancy of 90% or more and annual gains in lease rates.

Thats happening, they said, for three primary reasons. First, while retailers such as Best Buy Co. and Staples Inc. have been closing stores, chain stories such as Forever 21 Inc. and TJX Cos. TJ Maxx are expanding. Second, many retail landlords are bolstering their properties by adding tenants that offer services, such as restaurants, nail salons and gyms, rather than goods that otherwise can easily be bought online.

For every Best Buy or Staples with dramatic headlines about their downsizing efforts, there are five or 10 other retailers who have ramped up their expansion plans, like Nordstrom Rack, said David Henry, CEO of Kimco Realty Corp. , which owns stakes in 926 shopping centers. There is more demand for space than downsizing going on.

Third, retail landlords are benefitting from a dearth of competition as construction of new retail space has been limited. Developers are expected to complete construction of 19 million square feet of retail property in the top 54 U.S. markets this year in comparison to 159.4 million square feet at the height of the boom in 2007, according to CoStar Group.

To be sure, online sales represent one of the greatest threats that shopping centers have ever faced. Internet distribution of certain goods has devastated several retail categories, namely electronics, books and office supplies. Though still a small portion of overall sales, online sales are growing at a pace far outstripping the rest of the market. To wit, the National Retail Federation predicted Tuesday that holiday salesboth online and brick-and-mortarin the United States this November and December will increase by 4.1% this year to $586.1 billion. However, online sales, taken on their own, are projected by the NRF to grow 12% to $96 billion.

To that end, a new rallying cry among retail landlords is to recruit so-called omnichannel retailers, those that sell robustly both online and in their stores. Those include Apple Inc. Wal-Mart Stores Inc. , Bed Bath & Beyond Inc. and Saks Inc. s Saks Fifth Avenue Off Fifth.

Online sales are raising the bar for us in terms of the product we provide, said Don Wood, president and CEO of Federal Realty Investment Trust, which owns 85 U.S. shopping centers. We had better provide a more experiential, more social atmosphere. You want the retailers who have great distribution through the Internet. Theyre the smart retailers; embrace them.

Daniel Hurwitz, president and CEO of DDR Corp., which owns stakes in 459 shopping centers, highlighted one positive trend and one negative trend in the market. First, the move by some prominent retailers to shrink the size of their stores can become a benefit for landlords, he said. Replacing one big tenant with several smaller tenants diversifies a landlords risk, boosts the shopping centers sales and profits per square foot and often enables the landlord to collect more in rent.

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Retail Landlords: Malls Doing Well Despite Online Sales