It’s extremely clear that shoppers’ preferences are changing and those retailers and malls that can’t adapt are treading water or worse.
U.S. regional malls have struggled as anchor department stores like Sears, J.C. Penney and Macy’s have shuttered locations. However, some landlords—including Philadelphia-based PREIT—see these closures as an opportunity to recapture spaces and backfill them with higher-performing users.
PREIT has actively sought entertainment, fitness and restaurant concepts and other experiential retail to fill space in its malls to draw consumers, says Joe Coradino, CEO of PREIT, which owns the Plymouth Meeting Mall, Cherry Hill Mall and is redeveloping the former Philadelphia Gallery mall into the Fashion District. That redevelopment is a partnership with Santa Monica, Calif.-based Macerich at a cost of about $400 million.
While apparel retailers previously filled about 70 percent of PREIT’s mall space, today the figure is closer to 40 percent.
PREIT has also been selling off lower-tier malls. Today, the REIT owns and operates roughly 22 million sq. ft. of retail space in regional malls across the Northeast and Mid-Atlantic.
NREI spoke with Coradino about the state of the U.S. retail market and PREIT’s strategies.
This Q&A has been edited for style and clarity.
NREI: How has the PREIT portfolio been impacted by recent store closures and bankruptcies, and how have you been dealing with it?
Joe Coradino: We’ve been dealing with this for a while. Dealing with it in ways that we think we’ve had an advantage. We started selling off properties—lower-quality assets—in 2012. We sold off over 40 percent of our portfolio between 2012 and 2018, and that gave us a much higher-quality portfolio.
We also were quite aggressive in terms of anchors. We took back about a half-dozen department stores very early on, and we got back about another half-dozen. We don’t have any vacant department stores in our portfolio today.
We also got very focused on re-merchandizing and that goes back actually to 2009. Today, our portfolio is about 25 percent dining and entertainment, about 10 percent health and fitness, and our apparel count is down to 40 percent and change. Our top 20 tenants include tenants like TJX, Regal Cinema and Dave & Busters. It’s really a transformed portfolio.
NREI: So you backfilled department stores like Sears and Macy’s?
Joe Coradino: And Penney’s and Bon-Ton. We got hit with them all. Sears came out with their announced closings list today, and we’re not on it. We have the lowest Sears count in the sector. We effectively have four Sears stores.
NREI: Which retail chains are you most concerned about going forward and is J.C. Penney on that list?
Joe Coradino: We’ve been out to see J.C. Penney a couple of times this year. I think we feel pretty comfortable, given their sales volumes in our portfolio. We are looking at downsizing them in a couple of locations where we have tenants like organic food markets and large-scale entertainment complexes that we might want to add in those centers. We’re close to 94 percent occupancy in our portfolio, and we will downsize Penney’s a little bit if we can.
NREI: How is PREIT trying to balance growing its property income with making sure that the tenants aren’t rent-burdened?
Joe Coradino: A couple of things. One, our comparable store sales have grown from $340 a square foot to $530 a foot since 2012, and so when you think about a tenant being rent-burdened, it’s going to be because they’re not performing on a sales basis.
Again, as a result of all of the work we’ve done, we’ve seen significant improvement in sales, and I think tenants in our portfolio are less rent-burdened. Having said that, when it relates to online shopping, pick-up-in-store, etc., etc., to an extent there’s a reckoning occurring in our industry as it relates to how one calculates sales.
As we begin to get more sophisticated—and that includes the retailers being able to report on that basis, because in many cases systems aren’t there yet—we will be able to look at pick-up-in store or online sales from in-store, and I think what will happen is we will probably move to more of a guaranteed or minimum rent model with less percentage rent, and it will be based on the total store productivity. That includes online, from the store, pick-up-in-store and bricks-and-mortar purchases. That way, we’ll have a much more efficient pricing mechanism.
NREI: Instead of offering rent reductions to ailing retailers, some mall landlords are looking at positioning themselves as lenders to help tenants survive. What do you think of that strategy?
Joe Coradino: It’s six of one, half a dozen of the other. I’m going to cut their rent, but if they don’t make it, I don’t get my rent. Or I’m going to lend them money, but if they don’t make it, I’m not going to get paid back. I guess there’s a higher priority as a lender than probably as pure rent. But my take on it is, look, we’re in a partnership. Retail is the only real estate business where how the business performs within our real estate is so critically important.
If you own an office building, you don’t help the tenant get business—like a law firm or accounting firm or an industrial corporation. It would never even enter your mind. We’re in a real partnership where if they do well, we do well. However, it’s got to get structured, and what’s most advantageous for both parties is the best thing to do.
At the end of the day, you’ve seen the challenges of this business. We aren’t having this conversation because everything is hunky-dory. We’re having this conversation because there are lots of headwinds, and the headwinds will only stop when the retailers get healthy. It’s a difficult business, particularly given that the consumer is changing too.
NREI: How important is remerchandising and redeveloping malls is to make them successful?
Joe Coradino: It’s essential. If you look at our portfolio and redeveloped properties, our traffic is up 7 percent and sales are up in some cases double-digits. We’re seeing real results from redevelopments. We took a dozen department stores and replaced with them with 30 tenants.
NREI: That has to be a pretty expensive endeavor to break up those boxes.
Joe Coradino: But the return on capital is great. Assume that department stores were paying around $3 a foot. We will increase our rent in that department store eight-fold, and we will quadruple sales coming out of that department store box. If that department store was doing $10 million or $15 million, we can go to $40 million or $60 million. There are not a lot of $40 million to $60 million department stores in this country.
NREI: What does the future of retail look like to you?
Joe Coradino: When you look at the sector, you’ve got to look at the quality of the asset, and if you own good real estate, I think we’re at the tipping point in terms of retailers getting themselves healthy.
American Eagle is doing well. Abercrombie is coming back. Victoria’s Secret is getting it figured out. There are a lot of new retailers entering the space. We’ve done deals with retailers from Canada, China and Australia in the last four months, and all are new to the United States.
Again, it’s kind of no stone unturned. The key to this business is you’ve got to be in front of it. You can’t be with it or behind it. You’ve got to be in front of it.
