Mall Owners Push Out Department Stores
Fast-fashion chains, restaurants, specialty stores do a better job of driving mall sales and drawing shoppers
The Saks Fifth Avenue was demolished, too, to make way for a dining pavilion with 23 restaurants. And Lord & Taylor was carved into space for American Girl, H&M, HMB 2.33 % Forever 21 and Zara.
Once the linchpin of American shopping malls, department stores are being displaced by newer types of retailers that do a better job of driving shoppers to the centers and lifting overall mall sales.
Landlords are nudging out the once-coveted big box chains in favor of sporting-goods retailers, fast-fashion chains, supermarkets, gyms, restaurants, movies theaters and other types of entertainment as they seek to keep their properties relevant in an age increasingly dominated by online shopping.
“The definition of an anchor has changed,” said Stephen Lebovitz, the chief executive of mall owner CBL & Associates Properties Inc. CBL 4.86 % “Cheesecake Factory does as much business as Sears used to do.”
“The dependence of malls on department stores isn’t what it was 25 years ago,” said Sandeep Mathrani, CEO of another big mall owner General Growth Properties Inc. GGP 0.39 %
Since 2011, General Growth has taken back space from 65 department stores, or about 15% of its anchors, and filled the locations with new occupants that include H&M Hennes & Maurtiz AB, 24 Hour Fitness, Wegmans Food Markets Inc., Dave & Buster’s PLAY 3.33 % and other restaurants.
But as storied chains such as Bonwit Teller & Co. went out of business and others such as the May Department Stores Co. were acquired by rivals, the pool shrunk.
At their peak in the 1980s, there were 56 department store nameplates, Mr. Mathrani reckons. Today, the number has dwindled to roughly a dozen.
The remaining chains have closed hundreds of stores in recent years, as they grapple with online competition from Amazon.com Inc. AMZN 1.22 % and changing consumer tastes that have made department stores seem antiquated.
At General Growth malls, department store sales fell 1.9% for the 12 months through March, compared with a 4% increase at the specialty stores that line its malls. From 2005 to 2015 the disparity was even starker, with department stores sales dropping 10% compared with a 33% rise in specialty store sales.
Mall department stores aren’t dead, however. At 229 malls that real-estate tracking company CoStar Group Inc. CSGP 0.41 % examined over the past decade, one department store brand replaced another in 46% of anchor space that turned over.
But the remainder of that space, or nearly 54%, went to non-department store occupants such as food, home furnishings and sporting goods.
Redeveloping anchor space comes at a cost to landlords, but holds the promise of hefty returns as department stores paying as little as $2 a square foot in rent are replaced by new anchors paying $15 to $20 a square foot, real-estate executives said. If the space is carved into smaller parcels for specialty retailers, rent can approach $100 a square foot.
At the same time, the new, more productive tenants help lift sales at the overall mall by pulling in more shoppers, the executives said.
CBL spent $32.8 million on its share of the redevelopment of CoolSprings, which it owns with pension fund TIAA-CREF, according to a presentation it prepared for investors. The mall’s sales per square foot rose 15% to $543 in 2015, the year the remodeled Sears space opened, from the year before.
Dick’s Sporting Goods Inc. DKS -0.41 % has been snapping up space formerly occupied by department stores. “Penney, Kohl’s, KSS 0.94 % Sears, Macy’s, a few of them have announced store closings, there’s going to be real estate out there,” Dick’s CEO Ed Stack told analysts in May.
Department stores aren’t closing locations fast enough, according to research firm Green Street Advisors, which estimates that the chains would need to shutter roughly 800 stores, or about a fifth of mall anchor space, to regain the sales per square foot they had a decade ago.
Many department stores have long-term leases with multiple renewal options at below-market rents, which enables marginal stores to continue to operate for years.
For instance, more than half of Sears Holdings Corp. SHLD 2.92 % ’s leases expire in less than five years, but it has renewal options for the next quarter-century, according to its financial filings.
Sears Holdings pays $4.29 a square foot in rent on stores that are part of the Seritage Growth Properties SRG 0.37 % real-estate investment trust it set up last year, according to John Kernan, an analyst with Cowen & Co. and a Seritage investor presentation. That compares with other Seritage tenants that pay $12 to $24 a square foot.
“Landlords have tried to be more active in buying back space,” said DJ Busch, a senior Green Street analyst, “but there is a big gap in what they are willing to pay and what department stores are asking.”
Write to Suzanne Kapner at Suzanne.Kapner@wsj.com