Macerich is heading into year-end with plenty of reasons for holiday cheer. As of the third quarter, foot traffic across its 44-property portfolio had recovered to about 95% of pre-COVID levels, while average sales for tenants under 10,000 feet reached a new high of $877 per foot. The company also has enjoyed a robust leasing pipeline over the past 12 months with roughly 3 million square feet of signed and pending deals. Commerce + Communities Today contributing editor Beth Mattson-Teig recently talked with Macerich senior executive vice president CFO Scott Kingsmore to hear more about how the firm is positioning its portfolio for the future.

In your third-quarter earnings call, you reported strong leasing. What’s driving that activity? Is demand coming more from a particular type of category or categories?

The demand is quite literally coming from everywhere. We are always engaged with users in traditional retail categories, but diversification of use is our primary leasing focus and strategy. Our goal is to create a town center experience that delivers multiple “somethings” for everyone.

As we think about retail, there is a growing list of digitally born and emerging brands that covet space in high-quality centers with strong demographics. Think of brands like Fabletics, Vuori and Alo Yoga coming from the athleisure category, which is probably one of the hottest categories out there. Then there are brands like Warby Parker, Allbirds, Untuckit, Blue Nile, and the list goes on and on.

Electric car makers are adopting the Tesla retail model and taking space with high-foot traffic where they can access and educate the masses on their product like Lucid, Polestar and VinFast, and that list seems to continue to grow. Sporting goods is a huge category for us. Dick’s Sporting Goods and some of their new concepts like House of Sport, but also Scheels, which is truly a game-changing retailer for us coming soon at [Arizona’s] Chandler Fashion Center. Scheels is a bit like having a Dicks, REI, Bass Pro/Cabela’s all under one roof. And then you add in experiential elements like a Ferris wheel and a 16,000-gallon fishing tank in the middle of the store, and Scheels is a shopping playground.

We’re also seeing demand from health and fitness, medical and veterinary, large-format entertainment, food-and-beverage, grocery and international retailers like Primark, Lululemon, Zara, Aritzia and Uniqlo. Co-working is a growing category, and I think it’s reasonable to assume we will have co-working at 10 or more locations in our portfolio in the next few years. And in some cases where we have enough retail, there is great demand for mixed uses such as residential, hotel and office uses. To sum it up, the breadth and depth of users for our real estate has never been this strong.

Has that leasing velocity coupled with current occupancy levels given you any pricing power to raise rents, or are you not quite at that level yet?

We are starting to see pricing power now, but it’s early days. As we emerged from the pandemic, the focus was on absorbing vacancy, even if at the sacrifice of rental rate in some cases. We’ve now recovered 360 basis points in occupancy since early 2021, when our occupancy bottomed out at 88.5%. You can’t push rate without heavy demand and competition for space, and given all the categories and types of uses that we are doing business with, competition allows you to increase rental rate.

Most recently, we announced over 6% rental spreads for the trailing 12 months ended in Q3 2022. While that is not double-digit rental growth like we once received, it’s a start, and the major retail landlords all have started to speak of increasing pricing power as 2022 has evolved. Given a potential recession looming on the horizon, who knows what that may mean to rental rate growth? But it certainly does feel like we have turned a corner and that we are seeing positive pressure on rental rates more often than not.

Typically, we see some post-holiday shakeout among retailers on the edge. What, if any, shakeout are you anticipating within your portfolio?

For the past 12-plus months, we’ve seen only three leases subject to bankruptcy filing, and two of those are with a theater operator that recently filed likely given their unique circumstances. During the heart of the pandemic in 2020, we had 320 leases file for over 6 million square feet. Any tenants that were on shaky ground heading into the pandemic used that opportunity to file bankruptcy and right-size their store fleets. Looking forward, our watchlist is literally a fraction of what it was heading into the pandemic, so it does feel like we will continue to see this current, very low rate of attrition among our tenant base continue into 2023. There may be some, but it does not feel significant by any means.

Macerich has said that it had about $615 million in liquidity as of third quarter. What plans do you have for that capital?

As a CFO, I will say that cash is king, and as we head into a very likely downturn to some degree, we will be very cautious about where we invest our capital. We are very aware of the fact that with a rising cost of debt and with a low stock trading multiple relative to history, our hurdle rate for committing capital is higher. So every decision to spend capital comes with a lot of vetting and discipline. We recently announced two redevelopment projects — at [California’s] Santa Monica Place and [Arizona’s] Scottsdale Fashion Square — where we will spend $80 to 85 million of capital over the next two years at yields in the high teens. Our continued focus will continue to be on 1) reducing our leverage and paying off debt, as well as 2) accretive and meaningful redevelopments that take advantage of the value of our real estate but in a prudent and disciplined manner.

Retail is a sector that is constantly reinventing itself. How is Macerich working to better position its portfolio for the future?

It first starts with great real estate where people and brands want to be. If you don’t have that, your alternatives are very limited. We happen to have really great real estate, so the opportunities to transform our assets over time are very strong. Three things are working in our favor to effect this transformation over time. First, we don’t need as much parking as we once did, so excess parking field can be utilized to add density. Second, as department stores have re-sized their footprints and become vacant, that enables us to stay ahead of the curve and reshape the offerings at our town centers.

Third, there is too much retail supply in the U.S., which means there continues to be a natural consolidation of markets into the best properties, and we think in most instances, we turn out to be the winner or among the winners as this market consolidation plays out over time. We also have an extremely talented team of retail real estate professionals that continue to demonstrate creativity and discipline to bring great transformational ideas to the table. Not every one is actionable, for various reasons, but generally we’ve found ourselves with many choices from which to select.

What do you see as the biggest challenge facing the retail sector today, and how is Macerich working to address that challenge?

I really do think the biggest challenges are behind us. E-commerce was the big one that was going to kill the mall. As the world now seems to fully appreciate, both physical and digital not only do coexist synergistically, but they must coexist in order to maximize profitability and brand potential. That is why all of these digitally born retailers are and must continue to open physical shops to sell their product.

And then, how can you possibly come up with a bigger challenge than a global pandemic, which quite literally forced us to lock our customers and tenants out of doing business and then only permitted us to selectively reopen based on a very unique and jurisdictionally specific set of governmental mandates by market. In some cases, we had to close and reopen multiple times. How do you overcome the proclamation that you are operating a non-essential business because you have a roof versus if you don’t have a roof? That is one heck of a stigma, and we overcame it.

And lastly, dare I bring up a global financial crisis, we have resiliently survived all three of those extremes. So there will always be challenges, but we’ve survived the biggest of them. That said, I do hear there’s this thing called catalog shopping, and that’s new on our radar screen these days. Sorry, that was really bad mall humor!