Vacancy rates at U.S. malls are surging faster than any other retail property, a reflection of a pandemic that's forcing stores to close and one international operator to weigh whether to make a complete exit.
While the retail industry has been especially vulnerable to forced closings and capacity restrictions, a CoStar analysis found that malls are disproportionately disrupted. Vacancy rates at that property type rose more than other kinds of retail real estate last year, climbing just shy of 70 basis points based on the analysis, in a trend that's expected to worsen substantially throughout the rest of the year.
Faced with a tenant exodus from a lack of foot traffic in the pandemic, mall operators from Paris-based Unibail-Rodamco-Westfield to Macerich are struggling with depressed retail property demand and no clear sign of a recovery. Gap is planning to vacate 80% of its mall-based locations by 2023, and others including Sephora, Williams-Sonoma and long-time mall anchor Macy's are all pursuing freestanding or outdoor locations.
"Going into an enclosed mall with hundreds of other stores just isn't happening," said Randy Blankstein, president of net lease advisory firm The Boulder Group. "We're going to start seeing the better stores like Apple, Lululemon and others exit those malls and go into their own freestanding locations. They don't need the other tenants in a mall. The landlords and other tenants are the ones benefiting from having them there."
As tenants close up shop, Unibail is planning a departure of its own. Jean-Marie Tritant, the mall operator's CEO, told investors it would start selling its prominent U.S. properties as soon as next year, or when the investment market begins to pick up speed. The landlord owns 37 shopping malls across the country, according to its website, and is already in the process of selling some of its smaller assets.
“We are implementing a program to significantly reduce our U.S. footprint once the investment markets reopen, which should happen as soon as the economy rebounds,” Tritant said on a conference call, adding that the delay in putting them on the market is because of the fact that "there is no investment market in 2021 open today — that’s clear. We are assessing all potential options, at the end of the day, exposure to the U.S. will be minimal, if not zero."
The decision was prompted by the pandemic's erosion of the international landlord's operations, which also span most of Western Europe.
The problems facing mall owners were also on display for a landlord that said it is starting the year on better footing.
Santa Monica-based Macerich said in an investor call last week that occupancy at its malls across the country is about 90%, its lowest level since the Great Recession. The company reported more than $190 million in losses throughout the fourth quarter last year and a $38 million revenue drop because of COVID-related rent abatements.
Last year "was an extraordinarily tough year in so many ways for all of us," Macerich CEO Tom O'Hern told investors, recounting the company's shutting at some point temporarily of all 47 of its shopping malls and dealing with tenants who stopped paying rent. "We got most of our centers opened by mid-summer and all of our centers opened by early October with no further closures. There were not a lot of good days, but we battled through it."
Rent collections for the landlord bottomed last April when only 35% of its tenants fulfilled their financial obligations. By the third quarter 80% of total rent was collected, and Macerich closed 2020 having collected more than 90% of its total rent owed.
Macerich's leasing volume throughout the fourth quarter last year was 90% of pre-COVID levels for the same period in 2019, and the landlord signed 217 leases to encompass about 900,000 square feet. Doug Healty, the landlord's senior executive vice president of leasing, said that equates to an 80% jump in square footage leased compared to the third quarter last year.
But even that improvement was side-by-side with warning signs. The company agreed to $38 million in rent abatements throughout the fourth quarter, a hefty increase from the $28 million it issued in the third quarter last year. Macerich attributed the increase to extended closings in New York and California, home to the bulk of its shopping mall portfolio.
It added that most of the abatements were granted to local business owners and restaurants as it worked with national tenants on a case-by-case basis, agreeing to rental abatements when needed to secure near-term lease expirations or other concessions that would benefit Macerich in the long-term.
What's more telling is the increased amount of revenue it generated from lease termination fees last year. In other words, tenants are paying to get out of their mall-based space. Macerich reported about $15 million in revenue from terminated lease agreements last year, up $5.7 million it raked in throughout all of 2019.
"At the end of the day, what happens with retail depends on what happens post-COVID, or whatever that means," the Boulder Group's Blankstein said. "A lot of it will be about waiting and seeing how consumer habits change and whether they return to their old habits at all. For now, though, it's clear that malls and strip centers will most likely shrink."