The Shopping Center isn’t dying – It keeps Evolving

Fifteen years ago we all concluded that with the rise of new technologies, from laptops to smart phones, personal printers and scanners, video conferencing capabilities and more, the concept of offices will become obsolete, there will be no reason to go to the office, people will simply work from home or other remote locations, and will no longer need four-walled work places, the death of the office concept was imminent. Low and behold, even the largest of tech companies, like Google and IBM, eventually all went back to the “good old” office model. We all realized that there is more to work than just working on your laptop. People are simply social animals who want to get out of the house, meet and mingle with other people, brainstorm, socialized, and by doing that becoming better and more productive.

WeWork was quick to understand this, and took this concept a step further, creating a 'community' while leasing office space at high rents.

Founded in 2010, WeWork has gained enormous international success with their established co-working, or shared workspaces. A place where freelancers, entrepreneurs, and start-up enthusiasts can rent workspace with others, frequently millennials, has struck a powerful cord with the young public. Sure, people also work from home, I have a fully equipped office in my apartment, including video conferencing, but, by 9 AM I can't wait to be in my "office" where I meet my colleagues and have my first (or second) espresso which always tastes better.  

A similar phenomenon is taking place in the retail world. The powerful rise of E-commerce sent shock waves throughout the industry disrupting many categories, with everything from books to paper towels.

Although the way people shop is shifting from the classic brick-and-mortar model to also reliance on ecommerce and other omni-channel sales techniques, the simple fact is that people are social animals and will never stop needing good old-fashioned hubs of tangible retail coupled with services and leisure activities one simply can’t get online. In the end, just as people don’t go to the office simply to sit by their desks and type memos, people don’t go to shopping centers just to check things off their to-do lists. Rather, it is the added value of seeing others, window shopping, having a cup of coffee, eating at a “hip” restaurant or trying on beautiful outfits – in short activities which involve human to human interactions.

In retail center success stories, management is always at the core. Expert management is vital on both the global and local levels, and can mean the difference between triumph or failure for a new retail venture. Achieving the optimum tenant mix, redeveloping and repositioning existing assets, responding sensitively to local needs while adopting innovative technology to drive sales and build community, all while keeping the shopping center interesting to consumers. When we first built the shops in Skylake in North Miami Beach, it featured RadioShack and Blockbuster, two stores that had seemingly become obsolete. Our management was able to skillfully take these properties and re-tenant them into a welcomed Starbucks and a popular breakfast/lunch eatery called First Watch, creating a flurry of new activity and life in the once dead spaces. Indoor rock climbing became a great attraction in our main shopping centers in the Nordics, just as Decathlon, the French sporting goods store, is an anchor of our shopping centers in Israel and Brazil.

The Amazon Whole Foods merger is another step in the shopping centers evolution. Although Amazon built its enormous empire entirely online, the company is savvy enough to understand that some things simply cannot be done via the web, like picking out your own tomatoes or plucking the ripest melon of the batch. I believe that Amazon will use its readymade base of Whole Foods stores to catalyze its food sales and even more importantly, to serve as strategically located local distribution hubs. And strategic they certainly were. Amazon shelled out big bucks (an estimated $30 million dollars per store) to scoop up Whole Foods existing locations. Allmost all exiting Whole Foods locations throughout the US are located in high-density, urban, high socioeconomic neighborhoods—a fact that was certainly not missed by Amazon. The Amazon/Whole Foods deal showcases a very crucial point. Retailers located in prime 'A' urban locations with accessibility, visibly, and ideal socioeconomic structure will thrive as long as they are navigated by the right managerial team.

So while there has been a recent wave of branch closures (in large chains like Macy’s, JC Penney and Payless Shoe Source) and specialty chains that have completely folded (like bebe, The Limited and Wet Seal), many large retailers with strong management are moving in the opposite direction and expanding their physical presence.

According to projections, 22 existing brick-and-mortar retailers are set to open an additional 2,968 locations across the United States just this year. These include big-name chains like supermarkets Kroger (adding 55 new stores this year), Aldi (adding 28 this year with an announced goal of opening 2,500 stores in the U.S. by 2022) and Wegmans (adding 10 this year with plans to reach 100+ stores). Beauty and apparel chains are also adding stores in 2017, including Sephora (with 70 new stores), Ross Stores (90), TJ Maxx (65) and Nordstrom (17). 

Ecommerce retailers can also be added to the growing group who much like Amazon, have come to realize the effectiveness of complementing the virtual world of online shopping with real-world physical stores where customers can see, touch and often try out their proposed purchases. Among the ecommerce retailers planning to open stores this year are Bonobos (with long-term plans to own and operate 100 stores by 2020), Warby Parker and The Tie Bar (apparel and accessories); Apple, Dyson, Microsoft (electronics); Birchbox and The Honest Co. (beauty).

However, even with all this good news, it’s clear that store closures will continue to outpace store openings and new tenants will account for roughly 65% of the vacated space. This means that malls with weak management, poorly located – in economically weakened areas, or places with an oversaturation of retail space and/or high competition and low barriers to entry– will probably not make it. When it comes to malls, the location of an asset is not simply an address; it spells the success or decline of the asset. Survival of the Fittest theory can apply to retail malls as well—B/C grade malls are likely to become extinct, while A grade malls will flourish, given management makes the right decisions.  

You may recall that we at Gazit Globe announced some seven years ago the shift into urban retail centers in densely populated areas, while divesting our non-core assets, namely assets in secondary and tertiary markets. In seven years we sold  $4 Billion worth of assets, and invested  approximately $13 Billion, which increased the share of assets with a value greater than $100m dollar to more than 45% of our total assets, up from 17% in 2008.

So the big question is: What does it take for a mall to survive and thrive in today’s challenging retail landscape? First, if I haven't said it before, location, location, location! Second, maintaining the best management is of utmost importance. Since there is definitely demand for the spaces left empty by store closures, be proactive in identifying and building relationships with both the retailers that are growing and the e-tailers that are seeking to establish or expand their presence in real-world bricks-and-mortar. Real estate is no longer a bond- It's a business. Along every step of the way, from choosing location, to management, to tenant mixes and redevelopment, real estate needs to be tenderly tended to in order to create substantial returns.

Looking to the future, while some malls seem destined to decline and die, many others will emerge as thriving winners. The trick is just to figure out which is which—admittedly much easier said than done. But using our decades of experience, we continue to forge forward adding to our growing portfolio with properties in Miami, Sao Paulo, Stockholm and Warsaw, as well as other major urban location which we believe will make for some wonderful 'trophy assets'.