Malls Have Come Back From The Pandemic And The Retail Apocalypse That Never Happened

If doomsday post-pandemic predictions of malls and physical retail driving down a one-way road to oblivion were to be believed, Cafaro co-President Anthony Cafaro should not have a business, let alone come back from industry jamboree ICSC RECon in Las Vegas fresh and full of confidence about the future.

Cafaro is at the helm of a 40-center portfolio for an Ohio-based company that has been in the retail property business for 75 years. And while his world has changed dramatically in the past decade, it has not disintegrated, as many predicted.

“Certainly the industry has changed since our founding,” he reflected. “Nobody’s building a million-square-foot mall anymore, and that’s okay. We’re continually evolving to make our centers succeed.” 

Among his roster of regional malls is the 3.3M SF Eastwood Mall in Niles, Ohio, which, with 15 million visitors annually, is one of North America’s most successful. In a sign of the times, the mall includes not only the recent signings of a 160K SF Meijer grocer and 63K SF Bass Pro Shop but also a 6,000-seat baseball stadium that plays host to Major League Baseball Draft League’s Mahoning Valley Scrappers. 

It’s just one example of retail that isn’t as you used to know it. Because to survive, and thrive, many malls have adapted, evolved and quietly flourished. Online retail suppressed demand for physical retail, especially after the pandemic. Values and rents have dropped sharply, but both are creeping back. 

So whatever happened to the retail apocalypse? 

Cafaro said the widespread perception that markets away from America’s prime centers are struggling neglects to take into account the huge amount of work that mall operators in middle markets, like his own, are doing to reflect changing consumer trends and to maintain their position as local hubs.

And he is far from alone in seeing a profitable future in physical retail. French mall giant Unibail-Rodamco-Westfield has slowed its much-publicized exit from the Westfield North America business as performance has improved, and it recently announced rents at its two London Westfield centers are up 20% year-over-year.

Simon Property and Brookfield have invested in physical retail chains, most recently department store group Macy’s, and although retail transactions remain well below historical norms, deals are finally being made in the U.S. and Europe. URW plans to open an enormous mixed-use scheme in Hamburg toward the end of this summer as part of a major regeneration of the German city’s port area. 

It's all a far cry from 2020, when the coronavirus pandemic brought an unprecedented surge in e-commerce sales as lockdowns and social distancing measures forced consumers to shop online. Analysts lined up to predict that this would lead to a permanent shift in consumer behavior, with online shopping overtaking physical stores.

“By some estimates, we have vaulted ten years ahead in consumer and business digital penetration in less than three months,” McKinsey declared in a mid-2020 report. And it was far from alone in making sweeping forecasts about a permanent shift in consumer behavior.

It wasn’t the only huge shift ripping up the retail rule book. Anthony Klotz, a professor at Texas A&M University, coined the term “The Great Resignation” after 4 million people quit their jobs in the U.S. in April 2021. Within the biggest spike ever, 650,000 of those worked in retail, 4.3% of the 15.6-million-strong retail workforce. 

In a post-pandemic world, online retail was set to sweep away store-based retailing — and there would be no one to work in those stores anyway. It all added up to a mall meltdown, as the new order replaced the old.

Yet the reality told a different story. Malls did not crumble to the ground, retailers did not see all their sales migrate online and stores have, gradually, started to take center stage once again.

E-commerce growth has continued, doubling from 11% of total U.S. retail sales pre-pandemic to 22% in 2023, according to Department of Commerce data, but the rate of increase has slowed each year beyond the pandemic.

Last year total retail sales grew at half the rate of online — 3.8% compared with 7.6% — with U.S. e-commerce sales of about $1.1T in 2023 up from $1T in 2022. Total retail sales hit about $5.1T in 2023 from around $4.9T in 2022 but although growth was slower, it came off a far higher base and a much more mature sales channel.

What that means is physical retail continues to account for 83% of all sales.

“This year has been the reversion to the mean. We're now into the post-pandemic world,” said retail veteran and consultant Steve Sadove, best known for his time as chair and CEO of Saks Fifth Avenue. “E-commerce had been growing its share of the pie by half to a point a year, then there was a big spike overnight, but now we’re back to the same growth pattern.” 

He said technology and physical retail real estate will become entwined, and the industry is at the dawn of another major transformation, much of it based around the store.

“This is one of the most interesting times I've seen since the recession,” he said. “At Saks, after the recession, we saw this huge disruption of what became omnichannel. What is happening right now is as big: AI, analytics, data, segmentation.”

Meanwhile, data and footfall specialist Placer.ai pointed to consumers showing that they still enjoy the physical experience of shopping and the adaptation of major malls to cater to new requirements and expectations.

Foot traffic to indoor malls was down 5.8% in 2023 compared to 2019, Placer.ai said. That is significant recovery from previous years — traffic in 2021 was 15% below pre-pandemic levels.

“Contrary to the expectations of many, the mall is continuing to recover and regain its former status as a central pillar of the retail experience,” Placer.ai Senior Vice President of Marketing Ethan Chernofsky said. “One key driver is consumer demand for physical retail experiences. Simply put, there are unique benefits to the shopping experience in the store and customers are showing that they prefer having this as a part of their retail mix. 

“In parallel, top mall owners have succeeded in evolving the mall format to be more holistic and complementary, driving visits and experiences of a higher magnitude. The combination is fueling a wider brick-and-mortar renaissance,” he added.

The ongoing recovery was evident among attendees in Las Vegas as shopping center body ICSC held its massive annual event. ICSC Vice President of Public Relations and Research Stephanie Cegielski said that despite the pandemic raising questions about the future of physical retail, recent data has proven that those predictions are in stark contrast with today’s reality.

ICSC found that opening a new store led to a 6.9% increase in online sales nearby. The report highlighted that consumers still value the convenience of a real-time purchase as well as trying products out before they purchase, two things that continue to drive foot traffic to shops.

Cegielski added that this is not just about prime and super-regional centers. Smaller centers and small-format stores have been successful in fulfilling the needs in their communities.

“We know from our research that physical retail acts as a billboard for brands,” she said. “Retailers that invest in smaller spaces are capturing consumer attention with those storefronts, while also taking on less operational costs.”

This is not to underplay the difficulty of the past 15 years. Occupational recovery and rent adjustments have come with a price tag and owners have had to swallow a bitter revaluation pill. 

Taking 2007 as a benchmark of 100, in data produced for Bisnow, MSCI Real Assets has observed that mall transaction prices now sit at 64.1 in the U.S., while in the UK transaction prices have fallen steadily and sit a little above the Q3 2023 low point, at 28.7 this year. However, MSCI stressed that these figures are based on low volumes and skewed toward distress sales of poorer assets, so they probably exaggerate the situation.

In terms of mall valuations, a figure which includes those that haven't traded, the picture is a little more positive. U.S. malls are valued at 117 compared with 2007 but are well below the pre-pandemic peak. In the UK they sit at 32, a small uptick on last year’s low. Again, MSCI caveated that the figures for the U.S. relate to prime and super-regional, while for the UK they cover all malls, which explains some of the discrepancy.

There is another reason for the contrast. In times of recession and uncertainty, European and UK consumers typically batten down the hatches, impacting all discretionary spending. And yet in the U.S., the American consumer has bailed out the economy come hell or high water, and in the post-pandemic period it has happened once again, with personal savings now a fraction of their value in late 2020 as U.S. shoppers continue to spend. 

“Undeniably, the pandemic has had long-term impacts on the industry. Short-term, retailers, landlords and developers were forced to reassess their spaces and valuations,” Cegielski said. “Long-term, it’s clear that physical retail is a cornerstone of consumer behaviour, and those who successfully calibrated their physical footprint and valuations during the uncertainty of the pandemic — and in the years since — are well-positioned in today’s landscape.”