Ominous Decline in the Health of America's Shopping Malls

By Hayley Peterson

Shopping malls across the U.S. are struggling to survive. More than two dozen have shut in the last four years, and another 60 are on the brink of death, The New York Times reports, citing Green Street Advisors, a real estate investments firm.

The firm predicted last year that about 15 percent of U.S. malls would fail or be converted into nonretail space within the next 10 years. That was an increase from two years earlier, when the firm said that 10 percent of malls would fail or be converted.

Retail consultant Howard Davidowitz expects as many as half of America's 1,200 shopping malls to fail within 15 to 20 years. He predicts that only upscale shopping centers with anchors like Nordstrom (JWN), Saks Fifth Avenue and Neiman Marcus will survive.

"Middle-level malls are disappearing," said Davidowitz, chairman of Davidowitz & Associates, a national retail-consulting and investment-banking firm. "Developers are trying to do all kinds of things to save them, but at the end of the day, half of them are going to close."

Woes Spread from Department Stores

Even some luxury shopping centers are hurting. The formerly upscale White Flint Mall, for example, is nearing demolition. The 874,000-square-foot shopping center in the affluent suburbs of Washington, D.C., and once housed high-end department stores such as Bloomingdales, I. Magnin and Lord & Taylor.

Many malls are suffering because of recent widespread store closures among major department stores, such as Sears (SHLD), J.C. Penney (JCP) and Macy's (M). Once anchor stores close, it can be difficult for mall owners to find replacement tenants.

That puts pressure on other mall-based retailers. Radio Shack wants to close a quarter of its 4,000 stores, and Aeropstale (ARO) has announced plans to close 240 of its locations. Abercrombie & Fitch (ANF) has closed 180 stores since 2009, and Delia's is closing all 92 of its stores as part of its liquidation. "These middle-level malls are dragging everybody down," Davidowitz says.

Only 80 Percent Are Considered Healthy

A mall's health is measured by its vacancy rate, or how much retail space it has unused. Of the 1,200 shopping malls in the U.S., 80 percent are considered healthy with vacancy rates of 10 percent or less, according to the Times' report, which cited data from CoStar Group. That's down from 94 percent in 2006.

Nearly 15 percent of malls have vacancy rates of 10 percent to 40 percent, according to the data. The malls in the most trouble are the 3.6 percent that have vacancy rates of more than 40 percent. "The big question is, how many malls are there going to be in five years?" Bradley Snyder, executive managing director for Boston advisory firm Tiger Capital Group, told Bloomberg. "It's certainly a concern for landlords, with the entire sector being impacted."