The coronavirus pandemic is speeding up the demise of America's struggling shopping malls, which could deal a devastating blow to some towns that depend on them.
When a mall goes dark, a community loses more than just a place to shop and grab a slice of pizza at the food court's Sbarro. In many neighborhoods, the mall is an economic engine, hiring hundreds, if not thousands, of workers and providing a significant amount of dollars to the local tax base.
Malls and shopping centers across the country provide $400 billion in local tax revenue annually, according to the International Council of Shopping Centers, the retail real estate industry's trade group. And there are about 1,000 malls — both privately and publicly held — still operating in the U.S. today, according to commercial real estate services firm Green Street Advisors.
"I worry a lot as this crisis plays out," ICSC CEO Tom McGee said. "Our industry funds everything form the fire and police to [local] infrastructure."
In a pre-Covid-19 universe, teenagers would often land their first jobs at the mall. Kids would hang there after school. So-called mall walkers would use the open space in the mall before stores opened to the public to break a sweat. Mom-and-pop shop owners would open their first businesses there. And department stores, a mall's coveted anchors, once thrived during their prime.
The acceleration of e-commerce, along with a shift toward more consumers wanting to live downtown instead of the suburbs, has led to fewer people frequenting malls over the years. And as the pandemic hit, malls were boarded up, along with the stores in them. Some, including the Northgate Mall managed by Northwood Retail in Durham, North Carolina, are now closing for good. Former department store executive Jan Kniffen has predicted a third of America's malls will vanish by 2021.
As retailers aren't able to pay rent on time, landlords of America's malls are not able to pay their own bills, making matters worse during the pandemic and speeding up this domino effect. The Tennessee-based mall owner CBL & Associates warned earlier this month that its ability to continue as a going concern is in doubt after the retailers in its properties have skipped rent payments during the Covid-19 crisis, forcing CBL to miss two of its own interest payments.
Should CBL be forced into bankruptcy, it would mark the first filing by a commercial real estate owner during the pandemic. They keys to CBL's 108 malls could be handed back to lenders. Some of its properties could be shut down permanently, if no new owners emerge to take over and run these assets.
A CBL spokesperson declined to comment about a potential bankruptcy.
CoolSprings Galleria, a CBL mall in Franklin, Tennessee, offers up one such example of a property that is a huge aid to its local tax base. And as the mall has taken a hit during the pandemic, the town of Franklin is tapping into its budget reserves to make ends meet, according to one administrator.
"Our mall is such an attraction, it drives our revenue significantly," according to Franklin County City Administrator Eric Stuckey. "If you are so dependent on sales taxes [like us], it can take just a month or two and you'll see the impact."
He compared the situation with 2008 and the Great Recession.
"The recession had a real impact on disposable income," Stuckey said. "What people weren't able to spend at the mall ... translated into lost local revenue."
He explained that Franklin will need to use its fund reserves for the foreseeable future until CoolSprings Galleria bounces back, which he expects to happen over time since it is the only major retail draw in the area.
Others will be less fortunate.
"Malls die slowly, generally over a period of years," said Lacy Beasley, president of the real estate advisory firm Retail Strategies. "At first one anchor closes and then another. For a mall to shut down completely, the mall has already been declared dead by the customer."
However, the rapid acceleration of store closures this year, due in large part to the Covid-19 crisis, is adding to mall owners' challenges and could be speeding up that death. As many as 25,000 closures could be announced by retailers this year, according to a tracking by Coresight Research, with 55% to 60% of those in malls. That would set a new record, up from a previous record of more roughly 9,800 in 2019, the firm said.
As anchor tenants such as bankrupted J.C. Penney go dark, non-anchor tenants such as American Eagle or Gap typically have what are known as co-tenancy clauses to be able to vacate the property sooner if they'd like. With enough vacancies and nothing to replace them, a mall could be pushed out of business this way. (Penney is already kicking off going-out-of-business sales at more than 150 locations this month, as it tries to restructure the company in bankruptcy proceedings.)
To be sure, developers are trying to get creative. A former Sears store at the West Oaks Mall in Ocoee, Florida, was rebuilt into a Xerox call center. Ford Motor moved its offices into a former Lord & Taylor department store at the Fairlane Town Center in Dearborn, Michigan.
But it might not be enough.
"Malls can be redeveloped and released, but it often will never replace the impact [to towns] the mall had in their heydays," Retail Strategies' Beasley said.
PREIT, a real estate investment trust that has a portfolio of 21 malls in the U.S. including Cherry Hill Mall in Cherry Hill, New Jersey, said it pays more than $65 million in real estate taxes every year. In Pennsylvania and New Jersey alone, the company estimates that its malls account for about 17,000 jobs.
"When you think about a mall from an economic perspective, it's a real engine, there is no question about it," PREIT CEO Joe Coradino said in an interview. "We are typically the largest tax payer in any given municipality."
An analysis by Retail Strategies outlines the substantial impact a mall closure would have on local municipal budgets.
The average size of a regional mall in the U.S. is anywhere between 400,000 and 800,000 square feet, with three to five anchor tenants. So-called C- and D-rated malls, which bring in the least amount of sales per square feet, are those considered to be the most at risk to go under. These malls average sales of between $200 and $325 per square foot, Retail Strategies said.
That said, the annual sales receipt of an average C- or D-rated mall would be roughly $90 million to $145 million, according to the analysis. And at a 2% local tax collection rate, the locality that it is situated in would collect anywhere between $1.8 million to $3 million annually on the mall for sales tax, it said.
There are roughly 730 B- C- and D-rated malls in the U.S., according to Green Street.
As purchases made at certain malls have tumbled over the years, municipalities are left trying to reshape their budgets.
"Cities are more incentivized to help retail now than they ever have been," Beasley said.
Even the biggest mall owner in the U.S., Simon Property Group, has voiced concern over this issue.
Simon's portfolio of about 200 malls and outlet centers, including Roosevelt Field mall in East Garden City, New York, are by and large A-rated, making it one of the best operators in its space. Most, if not all, of Simon's malls are expected to stay open longer-term.
"We want to help these local communities because frankly they depend on our sales tax and our real estate tax," Chief Executive David Simon said in May during an earnings conference call, as he discussed the mall owner's plans to reopen during the coronavirus pandemic.
"I hope the communities appreciate what we're doing," he added, mentioning the Long Island area in New York as one example, where Simon pays more than $60 million annually in property taxes for a handful of properties.