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The November bankruptcy filing of CBL Properties, the large mall and shopping center REIT, echoes a dreary sentiment for malls, shopping centers and retailers since Covid came on the scene in March. The burgeoning trend toward e-commerce, accelerated by the pandemic, crushed brick-and-mortar traffic in 2020.

With 107 properties spanning approximately 67-million square feet across 26 states, CBL’s bankruptcy filing is a telling tale. In 2020 alone, more than 30 of CBL’s tenants declared bankruptcy, including major mall anchors such as JCPenney. Many tenants that survived required rent deferrals and abatements along with other concessions to help them sustain their operations. 

The traditional model of the successful shopping mall, anchored by a popular department store as a traffic generator for small shops and restaurant owners, has collapsed with the proliferation of e-commerce and the pandemic. Retailers located in shopping centers are increasingly utilizing space as showrooms for their omni-channel strategy, or providing a place to return goods that were ordered on line. 

As CBL points out in their bankruptcy filing, mall customers often make purchases online after visiting stores in the mall, and the resulting sales are not captured at the store, or monetized for the mall owners in minimum or percentage rents. More likely than not and especially during the latest holiday season, consumers bypass the malls altogether.

The result has been a record-setting year for retail bankruptcies. According to CoStar, more than 40 major retailers have declared bankruptcy this year alone and over 12,200 stores have closed.  

David Berliner, a partner and leader of BDO’s restructuring and turnaround service practice told the Monitor that January will be telling to see how retailers did during the big holiday season: “We will most likely see an uptick in bankruptcies and closures in the first quarter,” said Berliner.

The disruption is forcing mall operators to transform their properties. Many are hoping to become the new town center of an increasingly desirable suburban market. The Macerich Company’s executive vice president of leasing, Doug Healy, said the large mall developer’s focus has been and continues to be “morphing our malls into what we call town centers where there’s something for everybody.”

CBL says it hopes to attract more restaurants, entertainment, fitness centers, and lifestyle retailers that engage multiple consumer channels and moves the primary focus away from in-store shopping. 

Mall real estate is being converted to offices and apartment buildings. Cary Towne Center, an enclosed mall previously owned by CBL, was sold recently to video game producer Epic Games, for its corporate headquarters. GPI Cos. is transforming a former Macy’s at the former Westside Pavilion Mall (built in 1964) in Los Angeles to upscale office space. Brookfield Properties is replacing a closed Sears store at the Alderwood Mall north of Seattle with a 300-unit apartment building.

So, how should a restaurant operator think about their real estate strategy given the disruption around retail and the predictions of a stay-at-home, online ordering and post-pandemic lifestyle? 

Birchwood Resultant site specialist Bill McClave pointed out during the Monitor’s November Restaurant Finance Week virtual conference, that restaurant operators should locate new units near well-balanced trade areas, that include a diversified mix of residential, retail and daytime traffic.

“The residential piece by itself today needs to be strong enough—quality and density—to add up to the sales you need for your target return today. At the same time, you need retail and daytime traffic in the future, even if they don’t contribute in the short term, to hold on to those sales post-Covid,” said McClave.

Starbucks once sought locations in neighborhoods that were experiencing gentrification and renewal. Now forced to permanently close as many as 500 restaurants due to the pandemic, Starbucks is moving away from urban inline locations to high-volume, high-margin suburban locations with drive-thru windows. 

On a recent conference call, Kevin Johnson, Starbuck’s president and CEO, said more customers were working and studying from home and that Starbucks needed to adapt.  “We’ve seen U.S. transactions migrate from dense metro centers to the suburbs, from cafes to drive-thrus, from early mornings to mid mornings,” said Johnson.  

A Chipotle exec says the company is looking for sites with strong residential and daytime populations, too, because the digital sales channel has become increasingly important to them. With over $1 million of digital business booked annually in each restaurant, Chipotle is seeking steady growth from the order-ahead customer who wants the convenience of picking up their meal plus the cost savings of not having to pay third-party delivery fees. It is expanding the number of stores that have “Chipotolane” pick-up windows, and even is testing a pick-up-only location in New York.  

Shake Shack CEO Randy Garutti told a recent online audience he expects the chain’s urban locations to come back once the Covid vaccine is widely distributed, however, the company is hedging its bet with its first drive-thru location, which should open in 2021. 

Here’s betting a dollar the urban restaurant locations are slower to recover and the real opportunities lie in the suburbs.

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