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Internet Putting Malls on the Endangered List

Mall in Sao Paolo, Brazil
Photo by: Robert Windrem
Mall in Sao Paolo, Brazil

The internet has become a very merry money maker this holiday season.

IBM Benchmark, which tracks sales data from the websites of more than 500 leading U.S. retailers, finds November online retail sales finished up 15.6% over the same period last year. Mobile traffic rose by 12.6% while mobile sales climbed by 9.7%.

What's become a huge boost to retailers' bottom lines is now coming at a serious cost to shopping malls. The surge in internet shopping activity is putting many of the malls on the endangered list.

Citigroup Global Head Of Real Estate Thomas Flexner said fears of the internet knocking off the weaker shopping malls are finally becoming a reality. More and more retailers are downsizing square footage or closing less profitable stores.

"Once you get away from those class 'A' malls, there is just more risk. It is getting more difficult for tenants to make money, generate and produce sales," said Flexner. "The vacancy rates in the regional mall business are increasing in the lower productive or lower quality malls. And that is also where we see the biggest impact of the internet."

The problems aren't just affecting smaller shopping mall operators. Earlier this year, public real estate investment trust General Growth Properties put a portfolio of secondary malls on the market. It was generally viewed as an effort to prune their less productive assets.

Flexner said the situation is worse for drug and food-anchored shopping malls in highly competitive areas and in difficult local economies.

According to Stern Agee Senior Retail Analyst Ken Stumphauzer, the internet has meaningfully changed behavioral characteristics of consumers.

"Macy's has more than 800 stores. Does it really need more stores if you can shop online? The reason why these stores existed previously is because they were largely the only shopping destinations here in town. We've already seen evidence of this in recent years with Macy's closing two to three stores per year," said Stumphauzer.

He said Dillard's is a perfect example of this trend. The department store chain, which exists mainly in secondary and tertiary markets in the South, has closed ten percent of its stores in the past three years. Stumphauzer blames this on the internet's increasing prevalence.

The battle between the internet retailers and the brick and mortar retailers is expected to hit a new level this Saturday.

For the first time ever, internet retailer Amazon is doing a one day promotion that will pay you five bucks not to shop in stores. It's launching a special price comparison bar-code scanning application for smartphones. Not only does it intend to give shoppers a better deal, Amazon will be collecting information on competitors' prices.

Amazon's latest move could be just another nail in the coffin for weaker malls teetering on the verge of extinction.



Stephanie is Squawk Box producer. Follow her on twitter @StephLandsman

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