From a small northwestern observatory…

The current common wisdom (such that it is) about retail real estate is that the Amazons of the world will crush retail real estate.  Add to that the pressures of retrenchment among traditional shopping mall anchors such as Sears and JC Penney (neither of whom have figured out how to make “on-line” work), as well as the changing shopping habits of the millennial generation and the “halt” of suburban sprawl, and it comes as no surprise that only three traditional enclosed malls have been completed in the last decade, compared with 19 in the 1990’s (according to the International Council of Shopping Centers).

A neat article in the current edition of Real Estate Investment Today (REIT)  published by the National Association of Real Estate Investment Trusts, illustrated both the challenges and the potential solutions for real estate investors.  The principle focus of the article was on Macerich, one of the nation’s premier retail trusts.  While the article does a great job of illustrating how this one firm is addressing today’s challenging retail landscape, the underpinnings of the article were even more interesting for projecting the future of this important property sector.

Among other ways to address the issues, Macerich is targeting its top performing malls for significant redevelopment.  For example, the Tysons Corner Center in Fairfax, VA, is slated for a $525 million expansion.  In addition, many top-tier malls are being multi-purposed, with hotels and office space added for synergy and operational leverage. Much of the redevelopment has been aimed at making properties in densely populated markets more up-scale or even “luxury” branding.  Macerich also has a technology program, including social media, aimed at the millennial shopper. Finally, the outlet mall product continues to be strong, and Macerich intends to build a few of those in the near term.

On the flip side, Macerich sold about $1 Billion in assets over the past 14 months, and has another $250 million slated for disposal during the rest of 2014.  Lower quality assets and properties in secondary markets are largely on the chopping block.

What does this mean for the industry?  In some ways, the news isn’t all that bad.  The lack of new construction favors existing properties, particularly those with good fundamentals and solid (and growing) customer bases.  On the down-side, mid-grade properties are going to become “malls people USED to shop at”, and retail is extraordinarily hard to reposition.  Thus, while there are bright spots in retail sector, there are certainly players who won’t survive the next cycle.