Department stores are slowly but surely dropping like flies, and while they're unlikely to die out completely, recent closures have put mall operators in a very tight spot. Department stores typically serve as anchor tenants -- tenants that take up lots of mall space while drawing in customers and surrounding businesses. And while department stores tend to benefit from heavily discounted rent, they also tend to sign long-term leases, giving malls the security of incoming revenue.
But the reality is that malls have been losing a lot of department stores, and that trend will likely continue. For some retailers, it's easy to point a finger at the coronavirus outbreak as the source of their demise. In the wake of the pandemic, many well-known department stores, like Lord & Taylor, have permanently shuttered. Neiman Marcus is another high-end department store that hasn't been spared, and Nordstrom (NYSE: JWN), though in decent shape, has announced plans to close 16 of its 116 full-line stores. And let's not forget J.C. Penney (OTC: JCPN.Q), which has shuttered numerous stores and would have continued doing so were it not for a bailout from two resource-heavy mall operators.
Of course, malls may lose anchor tenants not just due to the pandemic but because of a shift in strategy. Such may be the case for Macy's (NYSE: M), which not only announced store closures right before the outbreak began but is also in the process of opening off-mall locations.
Either way, there's a strong likelihood that in the near future, a growing number of malls will need to find a way to get by without anchor stores. Here are a few options.
1. Focus on entertainment
Malls routinely house restaurants and movie theaters, so it's not such a stretch for them to expand into larger entertainment hubs. Malls could replace anchor stores with bowling alleys, arcades, and multilevel sports complexes that could occupy some space department stores leave behind.
2. Offer essential services
Retailers that serve as one-stop shops tend to thrive. Malls can follow that example by welcoming tenants that offer essential services, like grocers, pharmacies, and even walk-in clinics.
3. Pivot to office space
Many companies have shifted to remote work during the pandemic, which means they could end up dumping their office space once it ends. But these same companies may still need some meeting space, and malls can capitalize by converting empty stores to conference centers.
In fact, there are a few different models malls could explore in this regard, from daily rates to monthly or even long-term leases. Similarly, malls could jump on the co-working bandwagon and rent out empty space slot by slot.
It's all about innovation and creativity
Some investors may fear malls are on the verge of collapsing, but those that adapt well to changing circumstances could easily thrive, even in the absence of anchor stores. Mall operators may need to get creative in the near term as more retailers die out, but there are options for filling large spaces and drawing in customers the same way department stores used to.