The Dawn of the Dead Malls

George A. Romero, best known for his groundbreaking "Night of the Living Dead", released a little known sequel in 1978 titled "Dawn of the Dead" (remade in 2004). Lost to many in this cult classic is the scathing social commentary in the film on then contemporary America's addiction to consumer goods and it's unwillingness to face danger head on by remaining in a catatonic state of denial.

In the film, the loan survivors' flight away from the growing zombie presence lands them in a super regional shopping center, chocked full of all the material goods they could have ever wanted. Unfortunately, innate in the zombies is this same desire. When asked by a compatriot why thousands of zombies are lining up outside the mall doors and fighting for a more favorable position of entry, the hero answers "Some kind of instinct. Memory, of what they used to do. This was an important place in their lives. They're after the place. They don't know why, they just remember. Remember that they want to be in here". Unfortunately for the survivors, they become lulled into complacency by their surroundings setting in stone their fate and became zombies in their own right.

Dawn of the Dead is as relevant today as it was in the 1970s, however, more and more malls are being over run by zombie retailers and mass vacancies as consumer spending has gone beyond zombie and right into the grave. The fall of the mall has become a bit of a cult/pop culture phenomenon and is tracked on websites like Dead Malls.COM


So why do these malls fail, why do they sit vacant?

A BRIEF HISTORY

After the second world war, urban sprawl took hold of America as automobiles became obtainable for the average family and gas remained cheap. With this, there was a dire need for consumer goods in the new communities and equally as desperate a need for sales by the major department stores as their target demographics moved out of the big cities.

Building on this trend, the first regional shopping centers were erected in suburbs which had access to multiple jurisdictions that were home to "target demographics" - middle class families with disposable income. These locations were painstakingly chosen and designed so as to be centrally located to the maximum number of consumers within a 25 mile radius (later regional gave way to super regional centers with a 50 + mile draw).

These regional and super regional centers flourished throughout the 60s, 70s and 80s and were cash cows for anchors which would co tenant these developments. Sears, JC Penney, Marshall Field's and Macy's peacefully co existed in each project, typically drawing in different types of consumers. These mega stores brought in millions of visitors per year and drove high foot traffic numbers for specialty retailers inside the mall which would augment and complement the selection of goods offered by the anchors.

In the background, the consumer had begun to feel the squeeze in the late 1970s and early 1980s with decreased purchasing power of their dollars, high inflation and a severe recession. This caused a paradigm shift in the culture and a gradual move towards value...which would have come much sooner should the access to credit not have been made so easy.

Wal-Mart and like discounters began to emerge in the mid 1980s in blue collar, rural towns having a dramatic impact on the super regional centers and their sales. Complementing the drive to value, consumers now had the option of driving fewer miles and hitting a "one stop shop" to take care of all of their shopping needs.

The impact of this became dramatic when traditional mall main stays like Montgomery Ward and Service Merchandise went bankrupt in the early 1990s and others followed into the new millennium.

After the tech crash of 2001, the US economy was flooded with cheap credit and skyrocketing real estate/asset prices...the struggling retail sector boomed one last time and the retail footprint per person in the United States expanded to 20...almost 700% more square feet per person than Europe's highest retail square feet per capita of 3 in Sweden.

TODAY

In 2009 the largest department stores in the United States are Macy's, Sears and JC Penney - the last survivors with the specialty retailers that typically accompany them in regional malls barely hanging on as well (when was the last time you bought a $25 dvd/cd at FYI?).

The same problems of the late 1970s and 1980s bog down the consumer's ability to buy and the department stores find themselves losing more and more customers to off mall concepts such as Wal-Mart, Target and Costco with better prices and accessible locations.

The retail industry's problems have spread like a pandemic and now impact strip and power centers across the country.

WHY RETAIL VACANCY CAUSES A CHAIN REACTION

Co tenancy clauses came into vogue in the 2000s when the credit of tenants became more and more important for property owners. Unlike in years past, large, leveraged buyouts of private real estate companies created mega REITs which focused on national, "credit" tenants to improve the appearance of stability in their rent rolls. This helped them obtain favorable financing and the ability to create class A retail assets which could be packaged and sold to every type of investment company imaginable - even funds like TIAA-CREF that placed retirees' money into what was supposed to be rock solid, low risk investments.

The competition for the best tenants in competing malls and retail projects heated up and some tenants were able to grab the upper hand on landlords through favorable lease terms including "co-tenancy" clauses that spelled out rent reductions as drastic as 50-75% or even the ability to terminate the lease all together should other tenants leave the project/go out of business. At the time, these were easy promises to make as the boom seemed like it would never end.

The first wave of bankruptcies in 2008 took out major retailers like Circuit City, Linen's & Things and Steve & Barry's creating opportunities for others to opt out of their commitments should they choose to - dependent upon each lease. Many of the closures that result from co tenancy clauses are public - but the reasoning is not. Limited Brands, Chico's and GAP are all brands that typically built these clauses into their leases and recently exercised them and will continue to do so without the public knowing why.

For more on this concept, please read Co-tenancy Clauses Push Shopping Center Owners Toward Bankruptcy

ZOMBIES AT THE GATES

The REITs and landlords are 1-2 major bankruptcies from losing substantial numbers of their tenants without penalty and a total collapse of the industry. This cannot be understated - if a chain like Macy's were to go bankrupt and close even 25% of their stores they will unleash a chain reaction of co tenancy outs and outright closures of other stores that lose the foot traffic of anchors. The malls will be worth less than ZERO because they will carry high debt payments, millions in litigation against tenants and hefty common area maintenance/insurance and tax bills.

Like the zombies in Dawn of the Dead, the malls, REITs and retailers may be operating on instinct now but are already dead. The lesson we can all take here is to be proactive instead of reactive - anticipate the problem ahead and brace for another major shock from real estate to come.