Diversification key for mall developers as retail landscape evolves

The retail landscape is undergoing a radical transformation, impacting traditional mall anchors like Sears/Kmart and Macy's. The surge of competition from big-box outlets, e-commerce, and off-price stores is challenging the conventional definition of shopping malls. Kenneth A. Rosen and Eric S. Chafetz from Lowenstein Sandler LLP shed light on the evolving dynamics, emphasizing the imperative for mall developers to embrace diversification and redefine the traditional mall model.

The Evolution of Mall Definition:

Traditional anchor tenants are facing intense competition, resulting in the loss of mall tenants crucial for foot traffic. As a response, malls are at a pivotal point of either demolition or reinvention. The authors suggest that developers should consider new tenants like high-end restaurants, amusement parks, health clubs, and upscale movie theaters to revitalize malls. The transformation involves reshaping malls into mixed-use developments, challenging the established business model but recognizing the need for innovative amenities.

Embracing Diversification:

In the face of changing dynamics, mall owners and developers are urged to diversify. Diversification is likened to financial portfolio management, reducing the risk associated with retail-focused REITs. The article emphasizes the importance of diversification as a strategy to stay relevant and thrive in the evolving retail landscape.

Bankruptcy Implications and Opportunities: The article highlights the impact of tenant bankruptcies on mall properties. In Chapter 11, debtors can sell and transfer leases despite lease provisions, opening opportunities for mall developers. The authors explore scenarios where developers acquire leases from struggling competitors, potentially leading to partnerships and leveraging distressed properties for redevelopment.

As the retail industry anticipates more Chapter 11 filings and store closures in 2017, mall developers and owners are encouraged to view their competitors not just as rivals but as potential sources of new opportunities. The collaborative purchase of Aeropostale stores by mall owners in 2016 serves as an example of how strategic acquisitions can be profitable, signaling the ongoing transformation of malls.