Technology continues to change the way we work, live and shop. Office tenants are reducing the amount of space they need as many outmoded approaches are no longer needed. Just ask the lawyers about their libraries. Similarly, the need for brick and mortar retail establishments is facing the same pressure.
Online shopping is growing exponentially, reducing the need to frequent retail stores. “Experiential” retail has become the new buzzword. Yoga, fitness, restaurants, entertainment venues and other uses are now dominant tenants in downtown markets, strip centers and, to a lesser degree, regional malls, which have increased their restaurant tenancy over the years.
While the COVID-19 pandemic is expected to influence real estate assets, the retail real estate sector will experience the most dramatic changes. Online spending was up 25 percent in March from the same period last year. While shoppers were mostly quarantined, the trend toward online spending should increase over what was anticipated before COVID-19. This process will further lessen the demand for brick-and-mortar stores. The trend, which was already evident before COVID-19, is likely to accelerate.
Department stores and marginal centers will close at a faster rate than originally anticipated. Highest- and best-use may become the central question in valuation and redevelopment efforts. Planning initiatives will increase in a similar fashion, as seen with obsolete office parks after 2008.
The retail asset class that may face the most significant challenges will be regional malls. The very efficacy of their existence will be challenged. Some prominent mall tenants have filed for bankruptcy and/or announced permanent store closures. They include department store giants Macy’s, J.C. Penney and Neiman Marcus and inline tenants such as Forever 21, J. Crew, JoAnn Fabrics, Steak ‘n Shake, California Pizza Kitchen, David’s Bridal, Ascena Retail Group (Lane Bryant, Justice, Loft and Ann Taylor), GNC and Pier 1 Imports. Many of these retailers are typical mall tenants and, in some cases, major junior anchor stores. Of the 125 restaurant or retail companies tracked by S&P Global Ratings, about 30 percent now have a credit rating that suggests about 50 percent of these retailers could default on their debts, which is often a precursor of bankruptcy or liquidation.
An existential threat facing regional malls is the instability of anchor department stores. Once seen as the least risky tenant of all, they are now the greatest question mark. The decline of the department store was at the center of retail change well before COVID 19 pandemic. Department store closures and bankruptcies have been ongoing for some time. Green Street Advisors predicts more than 50 percent of all department stores will close by the end of 2021. Several department stores announced store closures before the pandemic but that trend has accelerated. Macy’s, Lord & Taylor, Nordstrom, Neiman Marcus and J.C. Penney have either filed for bankruptcy or are in the midst of a major restructuring and are announcing additional closures.
The failure of anchor stores is critical in several ways. Anchor stores were typically occupied by tenants with high credit ratings that provided marketing stability and foot traffic into the mall. Second, department stores are the predominant occupant in most malls and many inline stores have clauses that allow them to terminate their lease in the event the anchor store closes. The tale of woe (or whoa!) can go on forever.
New Jersey malls have not been immune. Well located, dominant malls are expected survive this crisis. However, mall operators will need to create new environments and experiences that produce new revenue sources and attract shoppers. Many redevelopment or repositioning efforts are already taking place.
The Shops at Riverside Square in Hackensack lost Saks Fifth Avenue and replaced a portion of the 100,000-square-foot building with an AMC Movie theater. The former Sears department store at Willowbrook Mall in Wayne is now tenanted by Dave & Busters and a new 12-screen Cinemark Movie Theater. Monmouth Mall in Eatontown has a redevelopment plan that will include new restaurants, medical office space, residential apartments and a pedestrian connection plan that will create a more walkable environment; Boscov’s and Macy’s will remain but Lord & Taylor has closed. Westfield Garden State Plaza in Paramus, one of the most profitable malls in the country, lost J.C. Penney, Best Buy and Uniqlo. A massive redevelopment effort will include new retailers, luxury apartments, modern offices an upscale hotel and new parks, gardens and green space.
New Jersey entered Phase two of its reopening plan on June 15. As time goes by and the recovery takes hold, we will see a new retail paradigm take shape. Time will tell.
Arthur Linfante is managing director of the Northern New Jersey office of Integra Realty Resources (IRR). Working closely with Integra’s National COVID-19 Response Team, the IRR-Northern New Jersey office conducts daily research on the economic impacts of the pandemic.