The overall American economy is in reasonably healthy shape right now, but there’s one area of the economy that’s struggling: regional shopping malls.
The problems are trickling down, essentially, from the department store sector, which has been rendered increasingly irrelevant by online shopping. Sears and Kmart announced 150 store closures at the beginning of the year, Macy’s is closing 68 stores, and JC Penney is looking to shut down 140 locations. The more upscale Neiman Marcus isn’t closing locations — yet — but the company announced on March 14 that it would like to sell itself.
A specific company or two getting into trouble isn’t necessarily that big of a deal, from an economic standpoint.
But the problem in this case exists throughout the entire department store sector. Whole malls are built around department stores — both literally and economically — and without those anchors, the entire viability of the mall ecosystem is jeopardized. The next recession, even if it’s mild, could leave America’s suburbs littered with a new generation of ghost malls.
Dying department stores anchor regional malls
The International Council of Shopping Centers offers a convenient six-part categorization of the American shopping mall. At the bottom end is, of course, the humble strip mall. The more dignified “neighborhood center” built around a supermarket is still primarily in the business of offering convenience, serving essentially only the group of people who live closer to that supermarket than to another supermarket.
The top two categories — the regional mall and the super-regional mall — of which there are, combined, about 1,200 around the country are where the department store pain comes into play. There are only a few of these regional malls in any given metro area, each is anchored by one or more department store, and each draws in customers from a wide shopping radius. A department store is supposed to be a place you don’t need to visit all that frequently (so convenience matters less), but when you do need one you are willing to travel.
These kind of stores — large, impersonal, stocked with a wide array of goods — happen to be right in the crosshairs of the ever-growing trend toward e-commerce.
Amazon keeps rolling out innovative ideas in terms of grocery shopping and convenience stores but they haven’t yet perfected a really solid model in either of those sectors. And, of course, they can’t match the intimate shopping experience of smaller shops, locally owned boutiques, or various kinds of specialty stores. And even though their delivery keeps getting faster and faster, it’s still usually not as fast as driving to a store yourself. Maybe someday the internet will crush all of retail, but that day is not yet upon us.
The Kmarts and Macy’s of the world, however, are not well-positioned to take refuge in any of e-commerce’s major shortcomings. They’re big places full of a lot of stuff that you’d like to have but probably don’t need on an emergency basis. They don’t serve a strong curatorial function or have particularly beloved brand identities. There’s nothing quirky and unique about them. They are struggling even in benign economic circumstances and are likely to be forced to retrench even next time unemployment rises or growth stalls.
Regional malls are facing ecosystem collapse
A large shopping mall, much like a traditional Main Street or downtown, is a complex series of interdependencies; everything you find in one depends, in some way, on the other parts of the mall. So if one part goes down, it can take the whole enterprise with it.
The presence of a food court makes the mall a more attractive shopping destination than it would be without dining options. But the destination shopping provided by the mall’s durable goods retail provides the fundamental rationale for the food court’s existence. The mall is a good place to visit a single-brand apparel store because there are other single-brand apparel stores there and you can conveniently visit several of them. And it’s a good place to locate your single-brand apparel store because customers are bound to be there and may stop into your store “just in case” — even if their primary intention was to shop elsewhere.
Specialty retailers make the overall mall visit more pleasant and entertaining, but they also benefit crucially from foot traffic and impulse purchases of items that wouldn’t inspire a dedicated trip.
Malls overtook traditional downtowns in most communities because they are planned and built, by design, to maximize the economic value of these interaction effects and to integrate well with modern transportation technology. But specifically because these are planned communities built to precise specifications, they are fragile. The architecture of a regional mall does not lend itself to large anchor store locations being broken down into smaller shops since the doors and walkways aren’t in the right places. And the mix of smaller shops is designed to be complementary with the big anchors rather than competitive with them. The overall scale of the mall is simply too large to work without big anchors that pull shoppers in from a wide radius.
Reworking malls may be challenging
These issues extend beyond the physical layout of the mall. As Eric Gould, Peter Pashigian, and Canice Prendergast wrote in a 2005 research paper, the complicated interdependencies are also embedded in law such that “mall store contracts are written to internalize externalities through both an efficient allocation and pricing of space, and an efficient allocation of incentives across stores.” In effect, some stores are being charged a penalty rent for the right to gain access to the foot traffic provided by the anchors. With them gone, the entire physical and legal infrastructure binding the rest together vanishes.
In the long run, most of the mall spaces will probably have to be entirely reworked into something new. But even this can be harder than it seems. The owners of a ghost mall in White Flint, Maryland, had an ambitious plan to redevelop the site as a mixed-use town center but has been stymied by lawsuits from the former mall’s lone remaining tenant.
Meanwhile, hosting a regional mall is a convenient way to extract property tax revenue while providing a minimum in public services, since a mall doesn’t need schools and generally provides its own miniature security guards and janitors.
Remote and largely featureless Amazon warehouses won’t offer nearly the same fiscal benefit — to say nothing of the impact on jobs. Worrying about the future of the retail economy may not yet have the political juice of worrying about the future of coal mining, but as unloved as malls are by tastemakers they are widespread pillars of local economies. We may miss them when they’re gone.