This story originally appeared on CNBC.com on December 7, 2018
By Lauren Thomas
Mall and shopping center owners across the U.S. are starting to talk about change, realizing that if their centers keep the same antiquated models, anchored solely by department stores, they risk them going dark in the coming years.
Roaming the halls of the largest retail real estate conference on the East Coast this past week, put on by ICSC, were more digital brands than traditional ones. Companies that started selling goods on the web — like Warby Parker, Untuckit, Allbirds, M.Gemi and Winky Lux — were taking meetings with landlords about opening stores. Also making a big splash were new concepts like Neighborhood Goods, Fourpost, Brand Box and HiO, which are pushing a new model where a slew of brands come together in one space, on a rotating basis, to sell merchandise targeting younger generations of shoppers.
"We are all getting more creative," Michael Glimcher, CEO of Starwood Retail Partners, told CNBC. Starwood is privately held and owns 30 malls and lifestyle centers across the U.S., including Metreon in San Francisco and The Shops at Willow Bend in Plano, Texas.
"What you realize as a landlord is that — by being more creative — it makes every mall different and every [shopping] trip different" for customers, he said. "It historically has been us asking: What is the best retail use for a property? Now it's: What is the highest and best use for this real estate" no matter if it's a Macy's store, an office complex, a medical facility or apartments.
As 2018 comes to an end, it's been announced that more than 146 million square feet of retail space will be shut across the U.S. in malls and shopping centers, according to real estate research group CoStar. That's far more than the roughly 105 million square feet of space that was announced for closure in 2017.
Sears, typically occupying more than 100,000 square feet for each of its stores, has contributed to a large share of closures this year, in addition to Toys R Us and Bon-Ton. And Sears' future is still uncertain as it's in the midst of bankruptcy court proceedings, with hundreds of stores still open for business. But many real estate owners and investors said this week at ICSC that they've already started to plan for a complete liquidation, should the department store chain be forced to shut all of its remaining locations.
"The [mall] anchors going out of business deserve to go out of business," Pyramid CEO Steve Congel told CNBC. Pyramid is a privately held company that runs more than a dozen malls across the country, including Palisades Center in New York.
"The consumer changes and preferences change," Congel said. "You have to not only reinvest but you have to provide people with what they want. … We're letting the consumer dictate what to put in our mall."
An industry that has long been opposed to negotiating short-term deals with tenants — because they promise a less stable flow of rent income — is now welcoming pop-up marketplaces like Brand Box or The Edit. And that's as digital brands, which were initially not thinking about opening stores, are investing heavily in bricks and mortar. Commercial real estate firm JLL has predicted e-commerce companies including Casper and Adore Me will open at least 850 stores, altogether, in the next five years.
According to Glimcher, the retail real estate industry is "turning a corner." And Sears filing for bankruptcy helped with that, he said, even though it meant hundreds of Sears and Kmart stores going dark. "Now it can all wash out."
Landlords including Simon and Seritage have already come out and said they see Sears store closures as opportunities to create more profitable centers. Seritage in particular is in a unique position in that its business was created entirely from Sears stores — as a spinoff — in 2015. But Seritage CEO Ben Schall has told shareholders that the real estate investment trust has the ability to redevelop its assets thanks to a $2 billion loan it received from Warren Buffett's Berkshire Hathaway.
"One would like to believe there's a mass answer [to fill closed stores] but there's not," Neill Kelly, head of the retail restructuring practice at commercial real estate services provider CBRE, told CNBC. "But that doesn't mean the better-positioned malls will use the opportunity to create value, provided the ... store closures don't exceed their ability from a capital standpoint to repurpose those spaces."