3/28/2011
By Brian Sozzi, Research Analyst

Online retailing is hot, hot, hot.  Once a miniscule percentage of a retailer's business, web stores now represent upwards of 8% of annual sales based on my data.  Not only are web stores cashing in on the top line but they are generally profit accretive (unless you are Barnes & Noble), seeing as the retailer doesn't have to pay rent, common area maintenance, insurance, and other expenditures typical to operating a physical store.  Capex budgets are becoming noticeably skewed towards the cultivation of the online business (technology investments to help expand shipping destinations internationally and mine data arriving to the site), with good reason as consumers are embracing the ease of use of technology to save time, money, and purchase products unique to the virtual shopping world.

Where has the fundamental upheaval in retailing left the country's over 45,000 shopping malls or strip centers?  Well, dead mall syndrome is predominant throughout the U.S. as retailers continue to shutter underperforming stores post Great Recession and small, locally-owned businesses are run out of town from online price transparency and rent rates that are simply constrictive.  However, for those malls that remain viable, a function of still favorable surrounding population demographics and tenant mix, the owners of the facilities are ramping up investment in order to attract new occupants and keep existing tenants satisfied.  All of the remodeling activity is being done in the hopes of charging even higher rent rates in the future and to stave off further consumer defection to online stores.  

Paramount to the efforts by mall owners is the desire to motivate consumers to shop the mall more than once a month.   Many malls across the country have not received a refresh in some 20 years (a rule of thumb was that a mall received a refresh every 10 years, but owners got complacent when the economy was humming along as consumers spent no matter of the décor and amenities) despite a minor upgrade package costing, say, $1 million to $3 million to complete.  So with rates on long-term debt quite attractive and materials and labor prices below their 2008 peaks, the likes of Simon Property (SPG), Vornado (VNO), and Westfield are realizing there is a compelling ROI to be earned by revamping a mall's parking lot or lighting fixtures.

Checklist of renovations and changes underway:

* Gone are the traditional anchor tenants such as Sears (SHLD) and JC Penney (JCP).  En vogue is a Target (TGT), Wal-Mart (WMT), Dick's Sporting Goods (DKS) or grocer attached to the end of a mall.  The opening of big box or grocery stores in a mall setting usually leads to a material pick up in customer traffic and a sales halo effect, giving mall owners a reason to demand stiffer rents from existing and prospective tenants.
* New mall entrances and stairways, lighter colored tile floors, food courts (seems to be a clear focus in updating the offerings with a farmer's market feel as opposed to a fast food feel), larger restrooms (including family restrooms), more inviting rest areas, LED lighting, and digital signs.

Factoid

* Approximately 242 malls (skewed to outlets) are expected to open their doors between now and 2013 in the top 10 cities as property developers take advantage of low land acquisition and materials costs.  Still, the fact is the U.S. remains overstored in terms of retail space relative to actual consumer demand.

Brian Sozzi
Wall Street Strategies

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