High-end malls are sitting prettier as upper-income shoppers spend more confidently and retailers angle to locate near them.
Affluent consumers have seen their incomes grow rather sharply since the recession and are benefiting from rebounds in the stock market and home prices, analysts say — while the rest of the population is still battling back.
It's led to a wide gap in performance between Class A malls, the ones that sell the most per square foot and tend toward luxury, vs. the others.
"The wealth effect is starting to kick in," said Ryan Sweet, a senior economist at Moody's Analytics. Sweet says rising home prices are making better-off homeowners feel freer to spend.
"They're seeing their houses appreciate and stock prices rising and they're recovering the wealth they lost during the recession," he said.
Some of that money has gone shopping, boosting retailer fortunes. But what drives earnings and cash flow for mall landlords is demand by retailers for a particular location, notes RBC Capital Markets analyst Rich Moore.
"The retailers doing the best are the high-end and value guys and the guys in the middle are having a harder time," he said.
The average vacancy rate for Class A malls — which command top rents — has fallen below where it was in early 2008 at the recession's start, says Ryan Severino, senior economist at real estate research firm Reis (REIS). The rate for Class B and C malls, which serve the middle- to lower-income crowd, remains 40% above its own early-recession level, he says.
Middle Muddles Along
Lower- and moderate-income consumers aren't seeing wage gains like the higher-income set, nor are they benefiting as much from the rising stock and housing markets, says Ken Perkins, president of Retail Metrics. So they don't have the extra disposable income to make a lot of discretionary purchases.
The result: Malls catering to the midmarket consumer are having a tough time along with their mid-tier retail tenants, watchers say.
"There is a pretty sizeable rift between the high-quality dominant centers that cater to more affluent consumers and other retail centers that cater to everyone else," said Severino. "That's largely a function of the fact that the affluent consumers are among the higher income earners, who are more insulated from the vagaries of the economy. These consumers continue to spend money at these centers, and at high-end stores.
Less-flush consumers have been more gun-shy about getting back into the stock market after the recession, Perkins says. And many still owe more on their mortgages than their homes are worth, or have just a little equity in them.
Against this backdrop luxury retailers have outperformed all other retail segments in sales, earnings and same-store sales since the first quarter of 2010, in an index compiled by Perkins.
The "barbell" effect is at work at retail and the mall level, says Suzanne Mulvee, director of retail research for the CoStar Group. It's either the discounters on one end or luxury on the other end that are doing well, with everyone in the middle getting squeezed, she says.
Mulvee says a key measure of a mall is its productivity. If a mall is tied to luxury retailers that are generating stronger same-store sales gains than a mall tied to middle-market retailers, its productivity will be higher and the landlord can demand better rents.
Mall operators such as Taubman Centers (TCO), which tend to have more luxury properties, are seeing higher tenant sales per square foot than those like CBL & Associates Properties (CBL) that have properties that are a little more middle market, she says. In 2012, Taubman's average tenant sales per square foot were $688, while CBL's were $354.
The top 25 Class A shopping centers in the U.S. have average sales that are more than $1,000 per square foot, while Class C malls have average sales of approximately $375 per square foot, according to data compiled by commercial real estate firm Jones Lang Lasalle (JLL).
The average vacancy rate for Class A malls is about 4% and asking rents have risen 15% in the past year — showing better negotiating power, says Garrick Brown, director of research for Cassidy Turley. Class B malls are seeing vacancy rates of 5% to 6% and no growth in asking rents, he says, while Class C asking rents are down about 15%.
Severino calculates the national vacancy rate at regional and super-regional malls at 8.3% in the second quarter, unchanged from the first. Rents grew 0.4% vs. the first quarter and 1.3% from a year earlier.
The performance of a mall depends on the spending profile of the customer base, which is tied to the economic conditions of the trade areas where the mall is operating, says Michael Niemira, chief economist at the International Council of Shopping Centers.
He says the A malls have a stronger economic demographic in their trade areas than other properties.
But it's not just the luxury retailers that are spurring performance of the top malls, he adds. It's the mix of retailers and the whole experience they offer that are the drivers.
What Makes A Top Mall?
Severino paints a picture of a high-end mall this way: It would have a more upscale anchor like a Nordstrom (JWN) or a Saks (SKS) vs. a midtier department store anchor such as a J.C. Penney (JCP). The restaurants would also be more upscale and it would have multiple coffeehouses. It would have fewer kiosks than you would see in low-end malls and a comfortable space to socialize.
On the flip side, centers that are doing poorly have high vacancy rates of 40% of more, Niemira says, and the "life" of these centers is very much gone: Shoppers probably only go to these malls for a specific purchase rather than to browse around.
The strong performance of the Class A malls is reflected in how investors value them. The two components are how much income the property generates and the return someone will accept for the income stream, says George Good, an executive vice president and shopping center investment broker with commercial real estate giant CBRE (CBRE).
He says the income from the high-end properties is going up faster than the middle-market or lower-level properties. That is causing values to increase more quickly for these better-valued properties, and the yield requirements are going down for investors, which means they're willing to take a lower yield or pay more for a property.
REITs are doing well up and down the chain, Moore says. Cash flow from rents is strong for community centers, malls, and outlet centers, including REITs like Simon Property Group (SPG) and Tanger Factory Outlet Centers (SKT).
Overall a mall recovery continues this year, Severino says. But tenant demand is almost entirely for Class A and trophy malls, Brown says.