Goodbye Big Box

First the old news:  Department stores are departing; Facebook has replaced the mall as our national hangout; and Amazon and its peers are where people now go to satisfy their shopping fix. These changes are taking a heavy and well documented toll on the regional mall, some 400 of which will fail in upcoming years. Another 400 will struggle, leaving only about 250 “fortress” malls that are expected to thrive. But you already knew all of this.

Now the new news:  All of this is only the beginning. Why? Because Category-Killers are getting killed. The Sports Authority, Golfsmith, Borders Books, Circuit City and HH Gregg are gone. Barnes & Noble, Kohls, Office Depot & Staples are going. And there are many more to come. The writing is on the wall…power centers will fast become the scene of retail’s next reorganization of itself. Fasten your seat belts.

You can call it a market-driven process, you can call it a correction, a response to shopping center overbuilding or to the shift to online shopping. But whatever you call it, its going to be a very big problem for owners, lenders, for the surviving retailers and everyone else tied to the retail real estate industry.

Regardless of how we got here, the gradual decline of big suburban shopping centers, regional malls and power centers alike, is a key factor to what I see as the most stunning and profound phenomenon in retail real estate in the past century – the flight back to the urban core.

In this respect, the now unfolding correction should ultimately prove healthy, as investment in long neglected core markets and scorned downtowns will spark a renaissance…in fact, it already is. Try visiting Oakland, CA, a city of half a million with zero regional malls and zero power centers, but thousands of units of downtown housing and new Class A office towers proposed and under construction, and one of the hottest restaurant scenes in the country. Growing appetite for core market advantages by users will incent investment and prove to be just the tonic that many American downtowns have been praying for ever since the slow descent of these markets began in the 1950s. Yet there will be many costly steps, bankruptcies and painful transitions along the way.

Core markets offer a resilience to economic downturns that can’t be duplicated in the suburbs, which lack employment density, transit infrastructure and the concentration of services that congregate in urban settings. Still wary of the next painful turn in the economy after the Great Recession, lenders, REITs, developers, investors and most importantly users have determined to hedge their bets going forward by focusing on those markets that offer resilience.

There are some 2,250 power centers in the US, nearly double the regional mall total of 1,150. Both asset classes are comprised of about one billion square feet of space, according to the International Council of Shopping Centers. The consensus among analysts is that some 35% of the regional mall inventory is failing, or destined to fail. Let’s do the math – if a comparable impact plays out in the power center arena, that would result in some 780 power centers going under.

Of course, none of these impacts to US power centers will play out if retailer bankruptcies suddenly halt, if internet sales suddenly begin to decline, and if lenders suddenly grow looser in their underwriting of new developments or acquisitions…

Fasten your seat belts.