Department Store Closures: Risk and Opportunity

The “Traditional Department Store” has long been looked at as the primary anchors for the development of enclosed mall properties. Department stores were traditionally considered key factors for driving traffic and sales to mall properties. However, the department store industry has seen great change, consolidation, and evolution over the past several decades. 

VARIED PERFORMANCE

The recent Sears bankruptcy filing was long anticipated.  The long-term viability of Sears has been the source of great speculation for years, and the future of Sears going forward is somewhat ambiguous.

The Bon Ton recently declared bankruptcy and closed all its stores. With one new store opened post-bankruptcy, and several new stores announced, it appears new ownership may try to reinvent the chain.

Other department stores, such as Macy’s are seeking to upgrade their in-store experience and reconnect with shoppers, building on a loyal base of customers. For example, Macy’s recently acquired STORY and invested in b8ta to integrate in-store experiences with innovative technology and increase customer engagement.  

Dillard’s recently reported fiscal 2018 results boasting a comparable store sales increase of 2%, representing 4 consecutive quarters of sales growth while maintaining margins and keeping expenses flat – a strong performance indeed.

One thing is clear, there has been significant turmoil in the department store industry, and more change is to come. 

WHEN A DEPARTMENT STORE CLOSES

In the past, the loss of one – or more – department stores from an enclosed mall property was a sign of significant distress at the property.

That is a perspective that is changing – and for good reason.   

The failure of a department store often says less about the potential viability of a given mall asset, and can be more reflective of the specific situations and factors that face that department store. By way of example, the Bon Ton had numerous stores that were attached to very successful, viable enclosed mall properties.  The fact that Bon Ton closed was a function of a chainwide liquidation and not at all representative of the performance or future potential of any given mall they were located at. 

In fact, the closure of a failed department store can be the catalyst for significant positive changes that directly benefit the community of tenants already at the property. 

Department stores usually occupy large anchor buildings. There are numerous examples of vacant department stores being repurposed into highly productive new uses.  Spaces formerly occupied by department stores can be subdivided and make room for dining establishments, entertainment venues and more popular retail stores.  The successful redevelopment of a vacated department store can generate more traffic to a mall property, resulting in more sales being realized – and driving more rental income than ever realized when the department store was open and operating.

CO-TENANCY

Another factor that is related to department store closings is the issue of “Co-tenantcy”.  Many mall shop tenant leases contain co-tenancy provisions that condition their responsibility to pay rent to the presence of a certain number of anchor tenants or department stores.  Such provisions provide the tenant the right to reduce their rent or have the option to terminate their lease when a department store or multiple department stores close.

Spinoso Real Estate Group is highly experienced in addressing department stores issues, analyzing risk of co-tenancy failures and creatively executing both short-term solution to quickly cure co-tenancy failures as well as long-term, permanent re-tenanting solutions that create value, drive sales, increase traffic and protect property’s rental income stream.

Please feel free to contact us for additional information.