American malls are facing a rebirth, and without a complete reinvention, they will be extinct within 10 to 15 years, the head of one of the nation's largest privately held real estate companies says.
"At one point [the indoor mall] may have met the developer's needs—and even for awhile, the consumer's needs—but it has outlived its usefulness," Rick Caruso, founder and CEO of Caruso Affiliated, said in a keynote address Sunday at the National Retail Federation's annual convention in New York.
In order to compete with the growing presence of online retail—which, according to comScore, saw desktop sales increase by 10 percent this holiday—physical stores need to focus on delivering an experience that customers cannot find on the Web, Caruso said. What's more, physical stores cannot only consider themselves to be in the retail industry, but need to embrace the hospitality industry as well.
"It's easy to get distracted by the relentless conversation of the Internet versus brick-and-mortar, but now more than ever what we need to do is focus on what has always been and what will always be essential to our customer: creating an experience that is magical, creating an experience that is memorable," he said.
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For Candace Nelson, founder of Sprinkles Cupcakes and a speaker on the panel, this has meant the invention of a cupcake ATM machine, where consumers can swipe their credit card at a machine and get a freshly baked cupcake at 2 a.m.
At Caruso's properties, which include the Grove in Los Angeles, it's meant features such as a trolley, which makes children want to visit the shopping center, or offering dining options so husbands don't rush their wives while they browse.
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"Embrace your advantage, which itself is disruptive to the technology that thinks it's so disruptive to you," Caruso said.
Traffic at physical stores has been on a steady decline in recent years, as the adoption of online shopping has taken off. In the recent holiday season, ShopperTrak data showed that foot traffic at brick-and-mortar stores fell nearly 15 percent, causing many to wonder what role the physical store will play in the future of retail.
(Read more: Why a 15% drop in holiday shoppers didn't matter)
Blake Nordstrom, president of upscale department store Nordstrom, said that while it's obvious that the customer is beginning to expect more from brick-and-mortar stores, the challenge lies in finding the capital and wherewithal to properly execute on these principles. It's also riskier for retailers to pour investments into physical properties because they don't have the ability to be as nimble as they are when making changes to their online presence.
Nordstrom said that in a world where shoppers have everything at their fingertips, physical retailers need to make consumers' experience across mobile, desktop and in-store as seamless as possible, or risk losing their business.
"We're all striving to stay as close as we can to the customer and make sure that we're in lockstep with her expectations," Nordstrom said, "because if not, they're moving on to the other great alternative."
—By CNBC's Krystina Gustafson. Follow her on Twitter