May 3, 2017
Traditional department stores face headwinds as consumers choose to shop in discount stores, at specialty stores and on the web. Major department stores have announced sizable closures this year, and as many as 324 stores across the U.S. will soon be empty, adding about 36 million square feet of vacant retail space to the market.
Department store closings have a relatively high impact on real estate in the U.S. because its regional centers and malls tend to have more space devoted to department stores than their counterparts around the world. In the U.S., 46 percent of gross leasable area throughout shopping centers is devoted to department stores, compared to only 27 percent in the U.K., the region with the next largest percent. This creates a distinct challenge for the U.S. retail market.
We reviewed what happened to recently vacated department stores and found that despite dooms day reports, many spaces were leased to new tenants, including restaurants, entertainment venues, grocers and even other department stores.
Because rents paid by department store anchors have historically been low, the opportunity to re-tenant space, in many cases, translates into higher rental income for the owner. Seritage Growth Properties is one REIT in the midst of unlocking this value. With a portfolio of 266 properties originally leased to a major department store, Seritage is redeveloping these properties and re-leasing space to new tenants. As of March 2017, apparel tenants, restaurant tenants and entertainment venues combined made up 57 percent of the new leases, according to JLL research.
Unlike the original mall food court, today’s food and beverage retailers, whether specialty restaurants or grocery, have become destinations themselves and in many cases have been utilized to increase foot traffic. At the Galleria in Houston, Fig & Olive and Nobu will each soon occupy a portion of what was once Saks Fifth Avenue. Outback Steakhouse and Yard House have leased space in a portion of a former department store in the King of Prussia mall in suburban Philadelphia. And at Oakbrook Center in the Chicago area, a lower level of Neiman Marcus was converted into two restaurants in 2013.
Along with dining, entertainment tenants have come to play a bigger role in shopping centers. Movie theaters, indoor theme parks and high-end gaming and arcade retailers have all laid claim to vacant department stores across the country. In one case, Premiere Cinemas took on the space of a former department store at South Plains Mall in Lubbock, TX. Other unique types of entertainment have also found homes in enclosed malls. At The Florida Mall in Orlando, a Crayola Experience opened in a portion of a former department store.
From local restaurant concepts, to bowling alleys and even discount apparel retailers, the variety of tenants interested in former department store space is surprisingly broad. Ultimately, the highest and best use for an empty anchor will differ from one shopping center to another. The demographics and lifestyles of the community that surround the center will play a large role in dictating re-leasing or redevelopment.
For more examples of tenants who’ve taken space in vacant department stores download Empty to Alive: The Next Use for Department Store Space.