Commercial Investment Real Estate May/June 2017 | Page 29

Malls also are adapting to that shift by positioning them-
selves as a social and entertainment hub and not just a place
to buy things. Malls and shopping centers are adding social
experiences, such as gyms and restaurants, that stay open
much later than the retail stores, Meier notes.
Retailers are creating more in-store experiences. In
Ontario, Canada, for example, several of the grocery chains
have added event space where they hold cooking classes,
wine tastings, and new product launches, as well as provid-
ing an area for childcare, he says.
Walls also are coming down between individual retailers.
For example, a coffee shop might decide to locate a store
within a bank, while drug stores are providing fresh food
and take-out options.
“It is about getting the consumers into the store and
keeping them there, so their dollars are spent all in one
location,” Meier says. At the same time, retailers are fig-
uring out that it is not one-size-fits-all in how and where
consumers shop, he says.
Reinvention of Malls
Online sales have already taken a toll on power centers and
battered big box categories such as office supply, electronics,
bookstores, and home furnishings. That focus is now shift-
ing to department stores, soft goods, and apparel retailers.
“Department stores are dying,” Graul says. “The age
of department stores anchoring retail is all but over, and
that has been coming for 20 years.” Retail soft goods uses
seem to be following close behind the department stores
— expanding and thriving only in the top 20 percent of
regional markets and projects, he says.
The retail market is still reeling from major announce-
ments in the past year that Macy’s will close 100 stores,
and J.C. Penney expects to close between 130 and 140
stores. Those closings have landlords scrambling to find
new anchors that will draw traffic. For example, Macy’s
closed its 149,000-sf store at The Marketplace Mall in the
Rochester, N.Y., metro at the end of 2016.
“That is a big dump of space. There is just not a back-
fill use for that square footage in new retailers,” says
Ira Korn, CCIM, owner and managing broker at
GENESEE Commercial Real Estate/CORFAC Inter-
national in Rochester. In most cases, replacing one
department store with another is simply not an option, as
department store retailers across the board have curtailed
new store growth.
Landlords are looking to redevelop those large spaces
to smaller shops and junior anchors, as well as restaurants,
entertainment, and alternatives such as an indoor golf
range to create more of an entertainment district, accord-
ing to Korn.
The A malls are continuing to do well in many metros,
while the B and C malls have been hit hardest with the
worst likely still to come, Graul notes. “The bottom 50 per-
cent of regional malls are in for a tough ride,” he says. “The
remainder will have to be re-invented, repositioned, rede-
veloped, or de-malled.”
Across the board, developers and landlords are working
to internet-proof shopping centers with restaurants, enter-
tainment, and service retail to help drive traffic to their
centers and backfill empty spaces. “People go out because
they want experiences, and restaurants and entertainment
In fact, the volume of food, beverage, and entertainment
tenants at malls has jumped in the past decade from an
average of about 10 percent of the merchandising mix in
2007 to roughly 20 percent today, according to Cushman
& Wakefield. However, there are signs that growth may be
beginning to slow.
According to Reis, the rate of job growth for restaurants
decelerated in 2016 to 2.2 percent from 3.3 percent at
the end of 2015. In addition, some categories that have
experienced heavy growth may be saturated and headed
for a shakeout. Restaurants that have not changed with the
times also may see fallout.
It is getting very tough to make money in the restaurant
industry with occupancy costs that are rising out of
control and outstripping the growth in sales, Graul notes.
CCIM.COM
Restaurants are battling increased competition and too
many seats in many markets, as well as higher labor
costs. That could create some additional vacancies
ahead, particularly among full-service restaurants that are
overpaying for real estate and cannot generate the sales to
support their high occupancy costs, he notes.
For example, gross asking rents of $75 psf are now
typical in the top suburban markets of Washington, D.C.,
which rival rents in the best downtown D.C. locations,
Graul says. That means a 6,000-sf restaurant would have
to generate about $6.5 million in sales to account for their
overhead, and there are very few restaurants out there
doing that type of sales volume, he says. “So margins
are getting thinner and thinner, and there is definitely a
reckoning coming,” he adds.
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