Department Store Departures Will Be Good For Malls In The Long Run

Image courtesy of Ben Schumin

While the nationwide retail apocalypse has led to lost jobs and terrible liquidation sales, there’s one piece of good news for consumers and for the companies that own malls. As old-fashioned anchors like Sears and JCPenney move out, more diverse stores, restaurants, and entertainment venues are moving in, and they’re paying much higher rents.

The old business model for malls meant having large retailers, usually department stores, as a theoretical draw for customers. Building a mall meant signing up anchors at much lower rents per square foot than other retailers, then filling in the rest of the mall from there.

“Without a department store, there would not have been a shopping center to be built,” a longtime mall developer told CNBC in a recent interview.

Now, the large spaces that used to belong to department stores are being divided up for smaller stores or converted into supermarkets, and that has an advantage that isn’t obvious to consumers. The new tenants pay a lot more rent than their departed predecessors.

CNBC uses the example of former Sears stores that are now being rented out by an affiliated real estate trust, Seritage. According to a new report from commercial real estate firm JLL that CNBC was able to see, Sears pays an average $4.40 per square foot for its stores.

When Sears leaves and other tenants like Whole Foods, Dave & Buster’s, Outback Steakhouse, or Primark divide up the space and move in, that old-school special price for department store anchors goes away.

Retailers that rent the old Sears spaces through Seritage are paying rent at an average of $12.74 per square foot — nearly three times what the former department store paid. And rents are going up, with newly signed leases averaging $18.55 per square foot.

For a moderately sized anchor department store space of 20,000 square feet, that’s $371,000 a month, compared to $88,000 a month in rent from older stores.

Malls are still giving some of their tenants breaks. Today, it’s relatively small Apple Stores that get breaks on rent from developers, because they attract shoppers to the mall while department stores are at least a useful place to park sometimes.

Diversifying away from just retail also means that malls still attract crowds even as retail sales fall.