Game over: US retailers are seeing malls threatened by the recession, but will the same happen here? And is a more transparent relationship between landlords and retailers key to preventing this? By Noella Pio Kivlehan
“Going dark” is the US term for malls suffering constant unit closures, while “dead mall syndrome” means game over. And, unfortunately for the US, around a third of its 1,500 malls are in danger of closing, making these terms more commonplace.
The UK has yet to experience any major shopping centre closures, but there are signs that some malls are starting to struggle (the quintessential British term), as shown by the collapse into receivership in January of Crossways in Paignton, south Devon.
The development of other centres is being delayed. Hammerson schemes in Eastgate Quarter, Leeds, and Sevenstone, Sheffield, are among those postponed.
Bad location can be to blame for failure, but many of the problems in the present recession are a result of poor trading: lack of money in customers’ pockets, a depreciating housing market and fears for the future are driving shoppers away from the mid- and upmarket shops, and into the value retailers, such as Aldi, Lidl and Primark.
This lack of consumer confidence is having a devastating effect in both the UK and US. In the US, more than 6,000 chain stores closed in 2008, and the International Council of Shopping Centres estimates that a further 3,100 will be joining them in the first half of 2009.
“In America, malls are going down like flies,” says Alistair Parker, partner in development and consultancy at Cushman & Wakefield. “It’s because their provision is so much larger and they have faster money.”
In the UK, 2008 saw the demise of major names such as Woolworths – now reborn on line (see p12) – and Zavvi, while others, such as Barratts and Priceless, went into administration at the start of 2009.
In February, Icelandic company Baugur – whose portfolio includes All Saints, Jane Norman, Oasis, Hamleys, House of Fraser and Iceland supermarkets – asked for protection from creditors.
All in all, the outlook is not good, and more failures are expected to follow. This has prompted fears among analysts that shopping centres will become dominated by value retailers as desperate landlords seek to get tenants into schemes.
Deborah Parker of PricewaterhouseCoopers says:”If we are not very careful, we will end up with malls of very boring retail shops. The challenge in today’s world is how landlords can create environments that are customer- friendly and interesting.”
Within the landlord versus tenant debate are two main issues. First, nobody in the UK wants the US situation, with centres facing closure. But neither is it desirable – at least for the sake of competition and choice – for those centres to be value-led clones of each other.
As a result, the present economic situation has forced a long hard look at the relationship between these two main elements. And this has meant looking at rents, and service charges, and also, for the government, business rates.
In the case of rents, historically tensions have always run high between landlords and tenants, with UK tenants preferring to keep their turnovers close to their chests and as far from their rental levels as possible. Fixed rentals are only acceptable to retailers.
In the US there is more transparency, with malls operating on turnover-based rents.
But the change in the economy has forced a change in attitude. “I’ve always been dead against turnover rents and landlords shouldn’t be in a position to take advantage of a really good retailer,” says PwC’s Parker. However, she adds: “But, in this market I don’t think you can take that approachany longer.”
In addition to rents, service charges are also coming under the microscope. In a statement issued last month, British Property Federation chief executive Liz Peace said that BFP members were deeply aware of the difficulties that many of their tenants were facing and they were keen to help those in genuine financial difficulty to weather the current economic conditions.
Specifically on service charges, Peace pointed to the initiative by Land Securities and British Land. Cutting charges at the Meadowhall Shopping Centre in Sheffield and White Rose Shopping Centre in Leeds was, she said, “a great demonstration of the practical measures they are prepared to take”.
But she added: “No one wants to see retailers go out of business, but landlords are businesses too and they are also being badly affected by the downturn. Our position has always been that the two sides must talk, and this is a great example of how it can work in practice.”
Open dialogue is essential, believes Richard Collyer, retail director at NB Real Estate. Alluding to the trickiness of the relationship, he says: “Nobody wants the divorce papers to land on the doormat without first having talked about the problem.”
The new word appearing now between both is ‘flexibility’. Simply put, Collyer says: “What we want is for retailers to get into shops, not for them to spend a fortune on legal fees, or fit-outs. There is demand out there. But we shouldn’t be putting up too many barriers to entry.”
However, Collyer admits that too much flexibility on the part of landlords could see fly-by-night retailers come in.
“But it is the job of the leasing agent and others to make sure that doesn’t happen. You have to do your research and if not happy you should ask to see a bank guarantee.”
As well as looking at service charges, a survey in January by the CBI/GVA Grimley showed there has been movement on rents. Two-thirds of retail respondents had looked at getting better rents and 29% actually got improved deals.
Also, three quarters of retailers have requested longer rent-free periods, with 40% being successful, and two-thirds of retailers have secured improved contributions to fit-out costs.
But is the rethinking of the landlord-retailer relationship all bad news? In the US there are those who believe that the economic downturn is the chance for the country to clean out what one commentator there termed “its massively overstocked mall cupboard – after all, the country has six times more retail space per capita than any other country”.
The UK does not have the same issue with the number of centres. It can be argued, however, that the recession will weed out those centres which have been underperforming and leave those that offer their customers a good mix and good environment.
As Collyer puts it: “There will be more malls where significant space will become vacant, and while I don’t want to name any, what I would say is that we are beginning to see cracks appearing in what were full centres. This will continue as the market gets harder.”
From the landlord’s point of view, says C&W’s Parker, “the choice is having zero income or having to do something to keep income coming in”. This is something that is now being put into full swing by the landlords in a bid to stop the lights going out on the UK’s centres, leaving them to go dark, and eventually to become dead malls.
Rethinking the Mall
Ten principles for turning an obsolete mall into an opportunity, in which underused mall sites can be redeveloped into attractive projects that have increased value, are sustainable, and make their communities more liveable:
– Learn how malls can evolve to be made more competitive in their market area
– Get guidelines on taking advantage of opportunities at the right time
– Understand how to integrate the site into the community
– Unlock the value of the land and restore viability to the site
– Determine what uses are appropriate for the market
– Build consensus among the public and private sectors, as well as local citizens
– Create a long-term development strategy
– Include pedestrian-friendly features and adequate parking
– Create a great place that serves as a magnet for the community.
Source: Rethinking the Mall by Michael D Beyard, Mary Beth Corrigan, Anita Kramer, Michael Pawlukiewicz and Alexa Bach
UK White elephants
The 2009 recession will clearly have a major impact on shopping centre trade. But it is the make-up of tenancy, design and location that has really affected UK centres in the past two decades.
Several UK centres have “gone dark” or failed for various reasons. These include being sited in the wrong location, having the wrong tenant mix, or a failure to let units. Some prime examples are:
Elephant & Castle, south London The 1970s famously pink centre changed colour for the BBC’s Red Nose Day a few years ago. Other than that, it is still waiting for a developer to drag it out of the doldrums
Bullring, Birmingham The concrete monstrosity, hemmed in by a ring road, was replaced by Birmingham Alliance’s new, successful model in 2003
Whitgift Centre, Croydon Opened in stages between 1968 and 1970, and was given a major, successful revamp during the 1990s
Arndale Centre, Manchester Built in various phases from 1972 to 1979, it became an eyesore for the city. Partially destroyed by an IRA bomb in 1996, the opportunity was taken to redevelop it.
“De-malling” and the “New Urbanists”
Just as the US was prolific in the building of malls, starting with the opening of Lake Forest, Illinois, in 1916, it has been just as keen to find alternative uses for those centres that have either totally or partly failed.
Two of the most popular concepts are “de-malling,” and the “New Urbanists”.
De-malling is described by Alistair Parker, partner in development and consultancy at Cushman & Wakefield, as “where you rip off all the shops on the front side, put in Spanish fountains and provide car-parking spaces so motorists can drive up to the mall”.
New Urbanism is described by C&W’s Parker as “walkable, live-work-play neighbourhoods with public spaces framed by architecture based on historical precendent.” As an example, Parker cites Santana Row in San José. Built in 2003, it comprises luxury restaurants, outlets, multi-million-dollar condominiums, spas and salons, and a 213-room boutique hotel.
