Amazon distribution center at the local mall? Reeling shopping centers seek lifelines

Here’s the latest entrant in our ongoing discussion of “trends that COVID-19 didn’t create but definitely accelerated”: the evolution of the American shopping mall.

We in the business media have been writing about the tenuous present and uncertain future of the shopping mall as we know it for years. The threats to its existence — online shopping and the resulting weakening of bricks-and-mortar retailing, especially department stores — have been doing their work for years.

Then along came the coronavirus. Smoldering fire, meet gasoline.

The global pandemic clobbered almost every segment of retailing — the most notable exception being online retailing. What that has done is make questions about the future of shopping malls louder and more insistent. What had already been a medium-term trend rather than a long-term one has now become a very short-term trend. How are malls going to survive when their tenants haven’t been allowed to admit customers and are closing locations by the hundreds?

The conventional wisdom has been that the mall has to evolve, to diversify the types of tenants that draw consumers to it. Malls would become more of entertainment centers and host businesses that hadn’t been part of a mall’s traditional tenant mix like health care or education.

It’s an interesting theory, but not one fully proven. It might never get fully tested. It’s tough to base a revitalization strategy on attracting tenants from business sectors, like entertainment, that are every bit as badly hit by the pandemic as retailing.

So, back to the drawing board.

The latest idea is to convert some mall space to warehouse and distribution space for … Amazon.com.

This isn’t exactly a new idea. Amazon has taken over some defunct malls for distribution centers, and it has converted retailing space to offices in places like the former downtown Seattle Macy’s store and the former Macy’s in Redmond Town Center.

Still, it is a measure of the desperation of the times that retailing property owners would consider handing over space in still-functioning malls to the company most responsible for the financial precariousness of those malls and their tenants.

That is exactly what Simon Property Group, owner of Tacoma and Northgate malls and outlet centers in North Bend and Tulalip, and Amazon.com are considering, according to a report in the Wall Street Journal.

For Amazon, the attraction is that it can convert space in an existing building faster and cheaper than building from the ground up. Adding distribution centers puts Amazon closer, and cuts delivery times, to its customers. The company’s appetite for warehouse space seems insatiable; at some point every other building and a few in between will be an Amazon distribution center. For now if the opportunity is there to add facilities quickly and cheaply, it will do so.

For Simon and other mall owners and operators, though, what’s in it for them? For one thing, they need the revenue to replace what was lost when the malls were shut down and replace what won’t be coming in as more retailers close more stores. It’s an acknowledgment of the inevitable, as well as the fact that almost everyone is in distribution and delivery these days.

“There’s no question there’s going to be material rationalization across the whole spectrum and that’s all the product categories within our retail sector,” said chief executive David Simon in a conference call with investment analysts following the release of second-quarter earnings (transcript from Motley Fool). “It will be malls, strip centers, outlets, certain outlets, power centers, lifestyle centers.”

Simon also knows he doesn’t have a lot of time to come up with workable solutions to what is ailing malls.

“A lot of the time when you had a product that was limping along, it could live for a while. That half-life has shortened over the last five, six, seven years. Now, it’s like immediately shortened.”

Simon believes his company has a few tricks to try before handing them all over to Amazon and declaring defeat. Retailers are increasingly using physical stores to fulfill their own e-commerce orders through delivery or pick up.

“That’s a good trend long-term for us,” he said.

Retailers also are experimenting with temporary or pop-up stores, in part, Simon said, because they’ve got excess inventory they’d like to move. And here’s a really novel idea — the mall owner owning not just the buildings but the tenants within them. That’s essentially what Simon did with its investment in a venture that has bought Brooks Brothers out of bankruptcy. That venture previously bought Aéropostale and Forever 21.

Simon acknowledges that there are too many malls, but the ones that survive the pandemic, the recession it created and the consolidation that followed will benefit from a reduction in the number of properties and a repositioning of those that remain.

“There’s all sorts of ideas floating around about what the mall can do and how it can service the community, and we continue to work on a lot of those things. … We’ve got to continue to evolve the product,” he said.

Lots of people were saying exactly that a year ago and would be today even if there had been no COVID-19. The shopping mall that so many of us grew up with was bound to look considerably different in another decade. Credit or blame the pandemic for the fact that, whatever the mall of tomorrow looks like, you’ll only have to wait about half that time to see what it is.