In the U.S., an increasing number of retailers have decided to leave the traditional mall. Now one mall owner, Unibail-Rodamco-Westfield, is leaving the U.S.

Three years ago, the Paris-based conglomerate took over several U.S. malls when it acquired some operations of Australia-based Westfield. The company, which now runs 28 properties here, last week announced it "will implement a [program] to significantly reduce its financial exposure to US assets in 2021/2022." URW last year already sold its interest in three U.S. malls, (Meriden, Siesta Key and Sunrise); now executives say they will focus on operating in Europe.

The pandemic, which tanked rent collections during much of last year and is now leading some retailers to demand shorter lease terms and other concessions from their landlords, is upending a U.S. mall business already in decline, with potentially lasting effects. Last year, URW's gross U.S. rental income fell 16.1%, and its net income from U.S. shopping centers fell 29.2%, according to a company press release. In a survey this month, Coresight Research found that because of the pandemic, consumers remain reluctant to visit malls; moreover, 23% of respondents said they plan to continue shopping more online and less in stores even once the crisis is over.

"But we see this more as a move to rebalance their own global real estate portfolio and focus on where they'll get the most return, than as an indication that the underlying assets will continue to underperform," Coresight CEO and founder Deborah Weinswig said by email. "We still believe that well located retail real estate will hold its value and that as brick and mortar reinvents itself, that prime properties will once again thrive."

A shakeout is already underway. Newly minted URW CEO Jean-Marie Tritant on a conference call with analysts last week said that a slew of retail bankruptcies and department store closures last year spiked the vacancy rate of its U.S. fleet. It's a situation that has affected the industry more broadly, squeezing what by Green Street's estimation would have been a five- to 10-year contraction into just two. In October, Coresight Research predicted that some 20% to 25% of malls will close over the next three to five years, most probably lower-end malls, according to Weinswig.

But the troubles at malls reflect the turmoil in department stores and specialty retail, leaving those with commodity retailers like grocery stores and mass merchants (often found in strip centers rather than enclosed malls), the most stable part of the business, according to Nick Egelanian, president of retail development firm SiteWorks​.

That means the situation is testing even top malls, according to recent research from S&P Global Market Intelligence. Two of those, mall owners Simon Property Group and Brookfield, have gone so far as to buy retailers out of Chapter 11 in a scramble to tamp down on vacancies.

"There is a lot of space in the U.S., retail [gross leasable area] that is B and C malls that are really deeply impacted by the crisis," Tritant said, according to a Reuters transcript, adding later, "I think that the U.S. market has to go through this somehow cleaning process of the — all these B and C malls that need to close. And I think that a lot of retailers have already started to exit these assets."

Today's high vacancies are only part of the problem, however, according to Egelanian. "Occupancy/Vacancy is just a metric to look at to get a sense of overall health of the portfolio, but it is not a direct determinant of value," Egelanian said by email. "Ultimately they will run B/C malls until net income dries up or loans come due that are in excess of asset value. So they will be left with A malls and better occupancy, but net income [funds from operations] will continue to be a problem."

While URW is starting the process of unloading its U.S. malls this year, executives said they expect 2022 to be the ideal time to sell. By then, they said, the pandemic will be over, there will be meaningful economic recovery in the U.S., and retailers leaving those dying malls will have filled up better performing ones like Westfield's. And URW's programs to integrate e-commerce — the company just created the role of chief customer officer to elevate that effort — has also drawn in DTC companies and retailers that have blurred those channels, Tritant said.

That all makes sense, Weinswig said. 

"Planning to sell these properties in 2022 makes much more sense than a fire-sale type sale today," she said. "And it's probably as much about waiting for a time when physical retail will have transformed itself in new ways, to better leverage physical space to make it work harder for them, than simply about clawing our way back to where we were pre-pandemic."  

And who will buy these properties? While late last year Simon closed on its purchase of high-end mall REIT Taubman, the developers that ultimately take over Westfield's properties may not come from the retail sector.

"We could see new players move into real estate that was once only for retailers," Weinswig said. "We have seen more healthcare tenants, residential properties, and fulfillment centers move into mall locations — and just as mall owners have been buying distressed retailers of late, players in any of these fields could be in the mix for acquiring some of these properties."