Closures with Consequences – August 26, 2024
Store closings are a day-to-day reality and may occur on a small scale (a sole proprietorship going out of business) or a large one (a nationwide chain going into liquidation after filing for bankruptcy and failing to find a buyer). Yet few closures have more of a ripple effect on the surrounding retail environment than that of a shopping mall anchor, particularly a full-line department store.
CNBC recently followed up on the announcement earlier this year that Macy’s will close nearly one-third of its 503 namesake stores by 2027. “When CEO Tony Spring announced the move, he said the stores that Macy’s will close account for 25% of the company’s gross square footage but less than 10% of its sales,” CNBC reported.
The company plans to put more money and attention into the approximately 350 namesake stores that will remain, reported CNBC. It will also open new locations for its better-performing brands: higher-end department store Bloomingdale’s and beauty chain Bluemercury.
“Yet the closures will be the latest catalyst that pressures malls to evolve to changing consumer tastes,” according to CNBC. “Macy’s is shuttering stores as the growth of online shopping and demographic shifts mean some small towns or regions can no longer support a bustling shopping center.”
Painful though the exits may be in the short term, the closures can be beneficial in the long run for both mall landlords and shoppers, senior director Chris Wimmer at Fitch Ratings told CNBC. The department store’s exit will accelerate the inevitable demise of “low-quality malls that really don’t need to exist anymore,” Wimmer said.
At the same time, the closures will give the owners of healthier malls “a chance to breathe new life and relevance into a shopping center,” CNBC reported.
Macy’s hasn’t announced which stores will remain open and which will go dark. However, within a roughly 10-mile radius of my hometown in Essex County, NJ are two Macy’s locations in malls which tell very different stories.
One of those malls happens to be among the most profitable in the U.S.—a Class A property if ever there was one. It’s a safe bet that it will be among the beneficiaries of the planned reinvestment into Macy’s locations that remain open.
Another, formerly vibrant mall elsewhere in the same county now counts Macy’s as its last remaining anchor, having lost two others in recent years, with neither one backfilled. That store is a likely candidate for closure: probably underperforming because the mall itself is.
Complicating the long-term outlook at this particular mall is the fractured ownership structure. The bulk of the mall sold—reportedly at a fire-sale price—to a regional owner a few years ago, but the anchor department stores, including Macy’s, were and still are owned by the retailers themselves. That could stymie any aspirations of redeveloping the entire shopping center.
“At some distressed malls, Macy’s may be the last anchor that remains,” CNBC reported. The gulf between haves and have-nots is growing wider in the mall space. Anand Kumar, associate director with CoreSight Research, told CNBC that weak U.S. malls have become weaker, and the strong shopping centers have become places where all retailers and consumers want to be.
Kumar expects that trend to continue. By 2030, he told CNBC, top-tier malls will draw a greater share of total mall spending, while their lower-tier counterparts will either close or be forced to convert more space into non-retail uses.
The silver lining in this cloud over the Class C and D mall landscape is that large-scale vacancies can mean opportunities for landlords and tenants alike. However, in the case of a Macy’s, landlords should probably expect to subdivide the space before leasing it up. With department stores receding, there aren’t as many takers for spaces that average 200,000 to 225,000 square feet.