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Mathias Sander, Director Leasing Strategy & Cooperations bei dan pearlman Group.

Corona – the fire accelerant

How resistant is the shopping center industry? Alleviating symptoms is not enough!

By Mathias Sander

It has been five minutes to midnight for the shopping center industry for quite some time. Now, the corona crisis moves the hand even further. As centers with basic providers are in emergency operation mode, many of their core tenants from the fashion retail sector fight for their survival. Is this, in the truest sense of the word, the witching hour? Empty stores, empty malls, empty inner cities – will this nightmare continue when the world will return to normal life one day? We have to see it for what it is: Corona is not the arsonist of this wildfire in the stationary retail sector, just the fire accelerant. As unforeseeable as this crisis was, it falls on fertile ground in an ailing industry that has been struggling for years to find solutions for the changes in people’s shopping and leisure behaviors.

Shopping centers are a risk group, corona boosts all the trends that have been challenging them for years, first and foremost online retail, digitization, and cut-backs on consumption. But even when one puts aside the omnipresent discussion about online and offline, they are corona patients with pre-existing conditions that need to be taken seriously.

Pre-existing condition #1: Utilization and tenant mix

The retail offer in centers is completely defined by chain stores and dominated by fashion providers. Many of these big mainstream fashion chains have weak profiles and are now, after years of struggling, sliding into insolvency protection proceedings, which were already imminent for some of them, but maybe not quite as fast as with the current officially decreed shutdowns. The longer governments try to contain the virus, the bigger the death rate in stationary retail will be. This will eventually happen elsewhere as well. Zalando’s current development shows that selling brands with a weak profile online does not work anymore either.

Offers need decisiveness, and this also applies to the tenant mix. The need for action gets even bigger when we expand the horizon beyond the retail sector. Today, almost no center has any share of non-retail use that is worth mentioning, gastronomy excluded. It is not easy to reallocate areas, since no other kind of utilization can promise similar leasing rates. And owners are rather conservative in most cases and only willing to experiment when the worst-case scenario becomes reality and the property’s devaluation is no longer avoidable.

However, there has to be room for experimentation if retail’s demand for space continues to decline. After corona, maybe this will also become true for other uses. Right now, it is hard to imagine that, for example, the demand for office and co-working spaces continues to grow, when the business world realizes that the large-scale home-office experiment turns out to be successful. Mixed-use is the new buzzword. However, there aren’t any successful examples. Certainly not a mix of uses. Even where relatively many non-retail uses exist, like at CentrO, it is more an either/or-use instead of a mixed-use.

Pre-existing condition #2: Quality of experience, stay, and design

The relevance of shopping centers depends on the quality of their locations. The key to success is quality of stay and experience. Even though it has always been this way, many centers have a lot of catching up to do in this respect. It already starts with the inclusion of surrounding urban environments and opening centers towards the outside, which has been neglected far too often. They are of course rarely integrated, oftentimes they are closed-off monoliths at the outskirts of inner cities, with big, visible yet dull facades. Competing instead of complementing. Tolerated instead of loved.

And yet bleakness prevails even on the inside. Revenue-driven, spatially optimized, as many properties lack a spatial experience. Big ideas in terms of interior design are nowhere to be found in the newly opened and revitalized centers of recent years. The outdated greenings and fountains from the Nineties have been taken out in most cases, but even in best-case scenarios they were only replaced with faceless and agreeable retail design. A feeling of wellbeing, quality of stay or even immersive installations, and surprising as well as breathtaking locations no longer exist. Shopping centers were something special in the Nineties, today they are normal. That’s okay, there is nothing one can say against it. However, what one can criticize is that no one even tries to be special anymore.

Pre-existing condition #3: Weak profiles and missing brand power

If you have seen one, you have seen them all. The more shopping centers there are, the more this sad saying becomes true, unfortunately. Brand growth was not followed by differentiation. Quite the contrary: Tenant mix, interior design, services, communication–all of them have become exchangeable. A shopping center is a shopping center is a shopping center. Only few of them have a recognizable connection to their respective environment. Where do they have significant numbers of regional tenants? Where do they have visible tributes to regional architecture? Which centers cannot be moved right into another city, just as they are?

How could you do some successful “placemaking” under these conditions, the way it is postulated in the industry nowadays. Turning “spaces” into “places” sounds nice but it is not just an act of communication. It is necessary to readjust the product itself in a way that it can be positioned as an independent and unique location. However, today’s shopping centers are rarely positioned in any shape or form. The will need help to distinguish themselves from the mainstream and even just get to the point where any kind of sustainable placemaking can begin that does not end with the same old fashion shows and wild animal exhibits.

Bottom line: Centers are facing the times of corona in a battered state. And they will end up even more battered when this is over. The major thoroughbred shopping icons like CentrO, AEZ or MTZ, maybe the top 50 in Germany, will shake of this crisis and go back to business as usual in a reasonably quick manner, but how about the 450 other locations? The goal of the current efforts is of course to keep as many retailers alive as possible. The common interests of retailers and lessors manifest themselves in close collaboration between HDE, GCSP, and ZIA, and a recently approved Code of Conduct. These are, at the very least, good initiatives to treat acute symptoms.

But where do we even go from here when things finally go back to normal? You don’t have to be a prophet to predict that the stores’ reopening will be accompanied by a unique discount battle that will be fought offline as well as online. Discounts have always been retail’s answer to everything. And there will be a certain amount of back log of course, the desire to go outside again, to shop again. However, it is feared that the lockdown will impact the people’s consumption behaviors sustainably. Don’t we manage quite well when we buy less? Will we shop more consciously and focus even more on aspects like quality and price? Above all, will we shop more sustainably? And will we–to return to the issue of shopping centers–expect the places we shop at to have a much higher standards than we were used to? That everything we really need is actually available at supermarkets or can be delivered by couriers?

Every crisis has its opportunities. The opportunities for shopping centers in this one are to heal their pre-existing conditions. It is an opportunity, even if that means that short-term investments need to be made, which will be recouped in the medium-term at best but more likely in the long-term. Since the NOI due to rent losses will be negative for many properties in 2020 anyway, the prospects without investments will be even more negative, and properties will be even harder to sell. Therefore, the long-term commitment is probably an attractive alternative for many owners to dress-them-up-pretty-and-get-rid-of-them. This would not be the worst market development, by the way.

It will need the following to run an attractive property after the corona crisis, one that people want to visit, lessees want to lease, and investors want to buy:

  1. A clear profile that distinguishes the property from its competitors, and a distinct identity that is derived from regional characteristics. A brand story and positioning that makes it unique, deeply rooted in its region and provide the guidelines for

  2. Utilization and tenant mix that incorporates the customers’ requirements in the respective catchment area and, where appropriate, leaves much room for identity-defining, individual, and experimental non-retail uses, which may even be unattractive from a lessor’s point of view. For example, it will not be possible to bring in significant entertainment options without being willing to sacrifice attractive areas for leases that are below those that chain-store retailers would be willing to pay. Sharpening one’s profile consistently must be more important than lease income maximizing. Securing the property’s value for the long term has to be the underlying principle for all considerations. It has to remain attractive for lessees and investors.

  3. Also, the interior design will ultimately be derived from the respective brand story and maximize the quality of stay and experience. All leisure activities will do all they can to get those couch potatoes up and to your doors, as we all will want to spend our time more selectively at places that amaze, inspire, and fascinate us. The centers’ interior design has to be taken to another level and set standards to compete with theme parks, hotels, cinemas, parks and all other new-leisure options.

  4. Last but not least, it will take placemaking to communicate unique locations as what they are, to leave established marketing standards behind and emphasize the distinctiveness of each individual location. 

Make no mistake: When countries and economies will eventually leave the quarantine stage of this crisis, the shopping centers’ actual struggle for survival, after first sigh of relief, is only beginning. This is the time for those who not only alleviate acute symptoms and allocate budgets for crisis-related losses in lease income, but who take this opportunity to focus on the actual causes and are ready to think radically, make the necessary investments, and develop their locations into properties that are marketable in the long term.

About the author

Mathias Sander, 48, looks back on 25 years of experience in the shopping center industry. As Director Center Marketing he was centrally responsible for ECE’s B2C marketing of shopping centers and founded as well as managed mall marketing, which he turned into a profitable business area. Since 2018, he has accompanied the repositioning and restructuring of various shopping centers in Germany, Austria, and Switzerland for dan pearlman.

The dan pearlman Group, advises shopping centers and retailers as well as leisure and entertainment parks or zoos as a strategic creative partner during their restructuring processes. The Group’s competences in location development and design are combined in the business field destination development, which also includes various mixed-use developments with a wide range of thematic priorities.