Mall-based specialty retailers are launching smaller, off-mall concept stores or leasing space next to grocers in open-air strip centers. Is this the latest expression of greater flexibility among such operators — a trend that dates to the lifestyle center craze of 20 years ago — or an ominous sign for U.S. malls?

Gap Inc. CEO Sonia Syngal’s comments could be interpreted as bad news for the mall business: “Our strategy is rooted in moving away from traditional malls and focusing on more advantageous locations to better meet customer needs,” she said on a third-quarter-2020 earnings call. Gap Inc. aims to close about 350 North American Gap and Banana Republic stores by the end of 2023. Likewise, Sephora’s largest expansion in 21 years will center on “growing its presence in off-mall locations.” That means more than 60 freestanding U.S stores, along with 200 locations opening inside Kohl’s.

Going off mall has also been a priority for L Brands’ Bath & Body Works and Victoria’s Secret. “With the continued change in our portfolio to focus on off-mall stores, we’re down to only about 35 percent of our revenue coming from mall stores,” Bath & Body Works CEO Andrew Meslow said, according to a Seeking Alpha transcript of the retailer’s fourth-quarter-2020 earnings call. He cited “significantly higher conversion rates” in those off-mall stores. Last week, news emerged that Victoria’s Secret will open 10 off-mall stores this year, after it formally splits from Bath & Body Works on Aug. 3.

Other mall retailers that have opened off-mall stores or are considering doing so include Bluemercury, Aerie, Hot Topic and Tillys, sources said. For its part, mall mainstay Macy’s has opened two off-mall Market by Macy’s stores in Texas, and a third is slated for McDonough, Georgia, south of Atlanta. Macy's Inc.'s Bloomingdale's, similarly will open its first smaller-format Bloomie's next month at Edens’ Mosaic District in Fairfax, Virginia.  “There definitely is a clear trend toward mall-based specialty retailers looking for off-mall sites,” said Jeff Green, a partner at national retail advisory firm Hoffman Strategy Group. “There are a couple of reasons for it. The economics of locating off mall can be much cheaper. In addition, maybe surprisingly, the traffic at some of these non-mall properties is now higher than at many malls. Those two things together have just changed the landscape.”

Cost control

Brixmor is in talks with several mall-based specialty retailers about opportunities in its U.S. portfolio of approximately 400 open-air properties, said vice president of research David Spawn. Back in the late 1990s and early 2000s when mall retailers like Banana Republic, Pottery Barn and Williams Sonoma started doing deals at suburban lifestyle centers, they were focusing on Wall Street’s demand for high store-count growth. But as Spawn sees it, cost control is a bigger part of today’s shift off mall.

Brixmor also is negotiating on its open-air spaces with emerging specialty tenants, ones that in another era easily could have been mall-only stores. Spawn cited Millennial-friendly Buff City Soap, which sells plant-based laundry soap and similar products that are handmade on the spot. “Brixmor is in active discussions with them at several of our centers where multitenant outparcels offer smaller, high-visibility spaces and provide easy in-out access to customers.” Those open-air centers are also close to where shoppers live, he added.

Flexible retailers

While these moves by mall-based specialty retailers could feed the timeworn “death of the mall” story line, Gordon Brothers president of real estate Thomas Pedulla said the trend is more about retailers’ growing flexibility — and the array of property types available today — than about a rejection of malls. “The old categories that we used for shopping centers for so many years are getting blurry now,” he said, “and they’re going to get even blurrier over time.”

Green cited a category-busting property in his own Phoenix neighborhood: Red Development’s Shops at Town & Country on Camelback Road, which has a lineup of restaurants and apparel tenants, as well as specialty grocers Trader Joe’s and Whole Foods. “Athleta, Bluemercury and Banana Republic all went there,” Green said. “The center isn’t that big and it isn’t a mall or a typical neighborhood or power center, but it is right on top of their demographic.”

Gordon Brothers real estate consultant Josh Podell sees little evidence of specialty retailers categorically rejecting malls. “In general, retailers are just trying to find the best real estate in a particular market, whether it is a strip center, a mall or a hybrid,” said the 30-year real estate veteran, who has represented the likes of Carter’s/OshKosh B’gosh, L’Occitane, Steve Madden and Eileen Fisher.

New prototypes may be part of that effort. The predominantly mall-based retailer Express aims to launch 10 smaller, non-mall Express Edit stores by the end of the year. Three of those already have opened, in Southlake, Texas, which is pictured at top; Columbus, Ohio; and Nashville. The product mixes at the 1,400- to 4,000-square-foot “street location” concept stores will “reflect local styles and trends within a particular market and even neighborhood,” according to CEO Tim Baxter’s comments on Express’ fourth-quarter-2020 earnings call.

Express aims to go from a mall-based specialty retailer to, in Baxter’s words, “a modern, relevant and compelling multichannel brand.” Abandoning the mall is not on the drawing board. “Our mall-based stores can be more productive, and we must also expand beyond the mall.”

Risks and challenges

Specialty retailers going to off-mall properties may need to rethink their real estate strategies, including their standard lists of ideal co-tenants. “They will need to think carefully about who else is in that non-mall center,” Pedulla said. “How does this relate to your business and your customer?” This may be imperative for upscale specialty apparel chains, which are accustomed to better malls with lots of fashion retailers. A transitioning-from-the-mall retailer might value traffic ahead of co-tenancy, Spawn said, and so could consider taking space in the company of The Home Depot, Walmart and Wegmans.

Higher-end tenants like Banana Republic, Bluemercury and Athleta may do better at higher quality open-air properties with other fashion chains as co-tenants, Green said. On the other hand, tenants like Bath & Body Works and Victoria’s Secret cater to customers that are more price sensitive, and these tenants thus can perform well in traditional community strip centers with co-tenants like Old Navy and Forever 21.

Smaller, showroom-type stores in off-mall properties might contain costs and facilitate internet sales, but they could disappoint those who want to try things on and take them home, cautioned Green, who has experienced this phenomenon firsthand. “The only sizes left on the racks may be on the extremes — a small or an XXL — but I’m a large,” he said. “I can’t tell you how many times I have been told, ‘We don’t have it, but you can order that on our website.’ It’s a bad experience for that customer and often a lost sale for that retailer.”

Limited space at the better off-mall properties is a constraint, as well. “You want to be in the best strip centers, just like you wanted to be in the best malls, but a lot of these strip centers are pretty well leased,” Podell noted.

The price of entry, too, could be steep. Podell pointed to Regency Centers’ Gallery at Westbury Plaza in Garden City, New York, on Long Island. The center boasts a mix of restaurants, a Trader Joe’s and outlet and nonoutlet tenants, many with mall roots. “They are asking close to $100 a foot gross,” Podell said. “It is a great project, a real hybrid and an example of what the outdoor center of the future looks like.” Finding properly sized stores with enough window frontage also could be a challenge. “There are all sorts of real estate limitations that you have to think through,” Spawn said.

Effect on malls

According to Podell, lower-tier malls are the likeliest to lose key tenants because of the trend: “It really is impacting C and D malls, mostly, and to some degree, B malls,” he said. But in the latter case, that may be just because the market had two B malls. “The weak mall may go away, but the strong one gets stronger. There are examples like that all over the country.”

Skeptical of the “malls are dying” narrative, Podell pointed to an opposite trend: strip center tenants moving to regional malls. “Instead of going to a number of open-air centers nearby, Ulta is inside Danbury Fair [in Connecticut]. And at both Freehold Raceway Mall [in New Jersey] and Colonie Center mall in Albany, [New York], you’ve got Five Below, Ulta and Carter’s.”

Meanwhile, Podell added, home furnishings tenants like Arhaus, Ballard Designs, Z Gallerie, Lovesac and Yogibo are taking space at malls in a big way. “Some malls out there today are creating entire wings dedicated to home furnishings,” he said. And the likes of Tesla and Lucid Motors are bringing car showrooms back to the mall. “Ten years ago, you never would’ve seen a car showroom or a furniture store in most malls, but when that mall opened 30 or 40 years ago, they were there,” Podell said. “It’s just funny how the cycle continues.”