The Biggest Problem Facing Retailers? Too Much Real Estate

Posted by Mad Mobile on October 28, 2016

The changes coming to brick-and-mortar retailers are including some difficult growing pains, particularly when it comes to shrinking their store blueprints. After decades of embracing strategies that valued massive stores carrying huge inventories and ever-expanding departments, stores face a weight-loss challenge: They need to get smaller and more efficient.

Major retailers have been gradually making this transition, with brands like Target and Macy’s moving out of suburban big-box stores and into smaller locations in urban areas.

But there are still problems to wrestle with, particularly where real estate is concerned. According to Business Insider, the U.S. retail industry is still carrying $48 billion in property loans for shopping mall locations.

Those loans cover properties that face the significant risk of devaluation, and could represent substantial retail losses by the property owners. And if retailers aren’t successful in transforming these spaces to maintain their value, it could lead to widespread movement among retail store locations across the country.

A Shopping Mall Trickle-Down Effect

One of the other problems faced by shopping malls has to do with a clause that can ripple through their entire store economy. When major retailers move out of a mall -- imagine JCPenney closing its location in your local shopping center -- it triggers a “co-tenancy” clause that other minor retailers signed when they agreed to lease the space.

That means smaller retailers have the chance to leave if a major retailer abandons the building. It’s a clause that could cause a lot of disruption and accelerate the downfall of shopping malls across the country, especially if those minor retailers take advantage and abandon ship before those malls turn into retail ghost towns.

These risks are significant, but they could be avoided or at least minimized by progressive actions now. Shopping mall property owners, for example, should be taking every opportunity to increase the appeal of their properties. Equipping the buildings with strong Wi-Fi service is a good start. Property owners should also work with major retail tenants to figure out how they might be able to retain their presence for longer.

There may be sacrifices to be made on both sides, but these solutions could be viable, even if they’re only stop-gap fixes. A better tenancy situation for retailers in shopping malls would at least alleviate pressure to find an alternative space, and give them more time to work on upgrading the in-store experience while evaluating other property options. The shopping mall may be a business model on its way out, but an embrace of innovation could at least prolong that life expectancy.

Topics: Retail