Even as coronavirus has been blamed for the record number of U.S. stores closings and bankruptcies of notable retailers from J.C. Penney to Lord & Taylor, the pandemic may actually be doing something that’s long overdue in the retail industry: “clean out of excess retail capacity,” according to a study.
Some 15% to 17% of U.S. malls may no longer be “viable as shopping centers” and need to be redeveloped for other uses, according to a 46-page report, titled “The Long-Awaited Reckoning for Retail,” by investment bank Barclays Capital. While that percentage may seem staggering, it pales against data that shows one-third of loans in the space that are currently in default, Barclays said.
“The Covid-19 pandemic has likely accelerated a long-expected rationalization of retail capacity in the US,” the report said. It’s “the final catalyst.”
The U.S. remains overstored compared to other countries. Per-capita retail sales square feet American consumers get averages 23.5, about 40% more than that of No. 2 Canada, double that of No. 3 Australia and five times that of No. 4 U.K., according to the study, citing a combination of other research.
With mall defaults and closures tied closely to the number of stores vacating malls in the prior year, a record 15% of U.S. mall stores that have permanently closed their doors this year don’t bode well for those malls that have been hard hit, Barclays said. For instance, more than 8,000 stores have closed in 500 malls it studied as the “replacement rate of stores” has declined and led to 106 listed stores per average mall this year, from 111 last year, and 112 in 2018.
The percentage of malls with more than 20% vacancy rate that land them in the “non-viability danger zone” has jumped to 28% in September from only 8% last year, the study found.
“That makes the tipping point a big issue,” the report said. “ Store closings have momentum in malls.”
In the year after a mall loses an anchor tenant like a J.C. Penney or a Lord & Taylor, malls see their traffic drop 5% versus others that don’t lose an anchor, according to the study.
While government-mandated coronavirus shutdowns have hastened the declines of many struggling retailers, many malls and their department store and other tenants were already struggling even before the pandemic, and Amazon
Aggregate traffic to U.S. malls declined in 20 out of 24 months in 2018 and 2019, and hit a bottom in April following Covid-led mall closings, according to the study, which looked at geolocation traffic and other data for nearly 700 U.S. malls. Mall visits recovered to 55% of January levels by September as many malls reopened.
“There’s no question there’s going to be material rationalization across the whole spectrum and that’s all the product categories within our retail sector,” be it malls, strip centers, outlets, power centers or lifestyle centers, David Simon, CEO of the largest U.S. mall operator Simon Property
While mall operator like Simon with so-called A malls in coveted locations will survive the pandemic damage, the underperforming malls may not be so lucky. A case in point, the bottom 60% of the about 1,000 malls in the U.S. held just 10% of the industry value, according to the Barclays report, citing other research.
As to failing malls, converting them to residential or warehouses could result in their values dropping 60% to 90% compared to pre- COVID appraisals, Barclays said.
Out of 94 vacant malls in a recent study by the National Association of Realtors in the US, 31% were turned into another retail format, while 16% were turned into mixed-uses, and 14% were converted into warehouses/fulfillment centers, according to the Barclays report.
“The bright spot is warehouses, where Amazon might need to triple its end-2019 footprint just to efficiently operate its current business,” Barclays said.
In a sign that Amazon has “appetite for more local capacity,” foot traffic in some of the online giant’s warehouses, especially those near malls that had seen big store closings in 2018, increased by as much as 400% in the second quarter, the report said.
Still, don’t expect Amazon to be “a backstop for malls.” After all, there are zoning restrictions and “building suitability” issues while the need for new warehouses from Amazon and its ecommerce rivals is limited compared to the number of malls that may not survive, Barclays said.
Related on Forbes: Simon Property sees an opportunity in bankrupt chains