The future of malls is shifting. Macy’s announced that it will be closing 150 stores over the next few years; other stores like The Body Shop and Express have announced bankruptcy; and inflation continues to soar, where it currently stands at 3.5% for the consumer price index.
What does this mean for the consumer? The rise in inflation is leading to many cutting back on spending for non-essential items. According to the JLL United States Retail Outlook Q1 report, restaurants are opening more locations. Dining spending grew 11.7% in 2023, compared to only a 2.6% gain for groceries.
The findings presented in the report outline that experience remains central to customers post-pandemic. And as Macy’s closures will result in higher vacancies , it is presenting new challenges – and new opportunities for malls.
What does this mean for mall occupancy, performance and future trends? Read the below insights from Keisha Virtue, Senior Retail Research Analyst from JLL to learn more:
Vacant Spaces Equals More Opportunities
The percentage of available space that has been leased is high, at 35.1% over the last 12 months, compared to 31.9% in Q1 2019 according to JLL’s report. For example, many tenants are expanding into strip centers, including Crunch Fitness, ACE Hardware and Jerry’s Foods. Other vacant spaces like neighborhood or community centers are also surging as they sign leases with vendors like Hobby Lobby or Planet Fitness.
In general, Macy’s closures are opening the doors to new opportunities and challenges . In particular, these closures will introduce different utilization ideas such as entertainment concepts, furniture stores and lifetime fitness. “We’re going to see a mix of tenants moving into these spaces,” Virtue says, “But I would say entertainment would be a fantastic option for consumer focus.”
Macy’s closures will likely impact Class B or Class C malls more than its Class A mall counterparts. Virtue said it will mainly affect the smaller-scale retail stores as we look ahead. “I don’t see class A being affected because their vacancy rates are at about 5.9%, compared to class C being 13% and class B being 8%,” Virtue says. “So, we’re definitely seeing huge differentials in what these classes are.”
Upcoming Trends for Retail
The strip center property types vary based on utilization. As Ryan Moore, CEO and co-founder of Last Mile Investment says, “Less than 10% of the tenancy of these strip centers are actually product based, for items like clothing, for example. It’s mostly service and a lot of it is medical.” These medical conversion projects trends were discussed at length during the annual BOMA Medical Real Estate Conference this past May . The consumer’s desire to travel far to receive treatment is dwindling. As Virtue says, “Consumers don’t want to go into these medical buildings somewhere far away to do something simple like a dental visit or getting their eyes checked. They want to be where they are normally going for their daily needs anyway. It just makes sense for these places to be really close where people shop and do day to day chores.”
In terms of looking at the numbers for retail growth, Virtue says that historically, coming out of the pandemic, we’ve seen remarkable strength from the consumer. “But we’re starting to see a little concern now because consumer sentiment numbers have fallen 10% over the last month or so [in May 2024],” says Virtue. Why might this be? JLL’s report indicates that persistent inflation is dampening consumer sentiment. Construction starts have been muted over the past year due largely to escalating financing costs, as well as high land, labor and material costs. As a result, many are “waiting for relief, ” Virtue says, “before pulling the trigger on construction .”
Not to mention, as inflation remains high, many buildings might not be prioritizing sustainable goals to their business portfolios, as the costs to complete these changes may seem beyond budget. However, speakers from the “ESG is Driving Capital Investments” session during the Medical Real Estate Conference discussed the ability to incorporate small changes to plans to net higher results. For example, implementing lights that automatically turn off if a door is closed - or restricting the ability to change the temperature outside of a certain range – are just a couple of small changes owners can make.
In the retail space, Virtue says that the industry is “becoming increasingly concerned when addressing sustainable solutions.” Recycled, or gently-used clothing, is a trend that will be expected to grow in the coming years, Virtue states, as consumers themselves are becoming more aware of their impact on the environment.
Malls Are Undergoing Transformations
Experiential uses can provide innovative ways to infuse excitement into existing malls, according to JLL’s Retail Outlook report. For instance, Netflix is opening a live event store in Prussia Mall; Casper, a sleep product store, will create dedicated “snooze bars” where customers can book nap appointments while their children play; and Bloomingdales is setting up friendship bracelet bars and crocs customization stations. These “immersive concepts” are built to engage consumers and reimagine the mall experience.
The focus on the experience is part of the post-pandemic appeal, Virtue says. “I think the pandemic and going into quarantine made people realize they need community and being social,” she suggests. “We found the percentage of e-commerce sales, while it spiked during 2020 to 16.4% retail sales, has compressed to 15.9% in the most recent quarter. ” The biggest reason why this change occurred is that many consumers want more than just transactional exchanges while shopping in person – they want experiences. “Really smart retailers are doing what they can to get consumers engaged,” Virtue says. As part of these growing experience efforts, brands are creating partnerships in the next few years to boost revenue, expand their audience and create novelty adventures for consumers. For instance, Madewell is partnering with local bookstores to engage different consumers’ interests, while highlighting small businesses.
“Malls are not dead,” Virtue says. “Everyone has been saying malls have been on the decline for decades now and yet they have remained relevant. It really depends on the mall, the demographics, the location and the type. I think we will see a lot of transformations for the spaces and utilizing old malls into something new and interesting. There is a lot of opportunity here, it really just depends on the specific location.”