By Robbie Whelan
BELLEVUE, Wash.--The nation's high-end malls are posting record
sales, thanks in part to the growing presence of technology
retailers that sell pricey goods.
At Bellevue Square, a shopping center in this affluent Seattle
suburb, electric car maker Tesla Motors Inc. produced sales of
$5,500 per square foot last January, more than five times the
mall's average and at a pace the mall's owners say is likely a U.S.
record for any retailer.
At a time when some big department stores are struggling and
Internet shopping is on the rise, the mall industry is doing
surprisingly well. Sales have risen each year since the recession,
from $383 per square foot in 2009 to an estimated $478 in 2014,
says the International Council of Shopping Centers.
Malls owned by real-estate investment trusts, which tend to have
more luxury tenants and often are located in large population
centers, generated a record $550 in per-square-foot sales in the
third quarter of 2014, shattering the previous high of $450 a
square foot reached in 2007, according to REIT research firm Green
Street Advisors.
No one tracks sales per square foot across all retail stores.
But landlords say a big driver of malls' recent resurgence has been
a new generation of technology-focused tenants, such as Tesla,
Apple Inc. and Microsoft Inc., that are ringing up strong sales and
supplanting "anchor" department stores that malls used to rely on
to bring in customers. Tesla and Apple declined to disclose figures
for their stores. Microsoft couldn't be reached for comment.
"They do very high volumes," said Peter Lowy, co-chief executive
of Westfield Corp., of the high-tech tenants. Westfield has 16
Apple stores, six Tesla locations and six Microsoft stores in its
38 U.S. malls. "Your company's sales per square foot are really
boosted by those tenants."
General Growth Properties Inc., the nation's second-largest mall
operator, said Apple's rollout of the iPhone 6 was a main driver of
its 6.7% increase in September monthly sales. Without Apple, sales
would have risen only 4%, Chief Executive Sandeep Mathrani told
analysts in October.
Some traditional mall anchors like J.C. Penney Co. and Sears
Holdings Inc. are in a prolonged slump. J.C. Penney suffered a
per-square-foot sales decline of 30% from 2010 to 2013, the most
recent year for which data are available, according to investment
bank Imperial Capital. Sears doesn't report average sales per
square foot, but sales at stores open at least a year have fallen
by a cumulative 12.1% since 2010, according to investment bank
Evercore ISI.
Yet for malls overall, the trend is moving the other way: Sales
per square foot among mall REITs are up 36% since 2010, according
to Green Street. That is a sign that mall owners are pruning their
portfolios of less-productive properties while filling vacant
spaces with more-productive retailers, including high-tech
tenants.
The new tenants tend to be far more profitable for malls than
anchor stores because, under typical lease agreements, they are
required to share a percentage of their sales with their
landlords.
Anchor tenants, by contrast, typically own their spaces
outright, though they often contribute fees to help maintain common
spaces. They serve mall owners mainly by attracting shoppers to the
smaller retailers between the anchors, known as "inline"
stores.
Investors have benefited from malls' resurgence. In all, REITs
that own regional malls produced a total return of 35% in 2014,
including dividends, according to the National Association of Real
Estate Investment Trusts, second only to apartments and health-care
properties among the big REIT categories.
High-tech stores have helped malls fend off the Internet
challenge as well.
The share of retail sales completed online has risen steadily,
from 4% in the third quarter of 2009 to 6.6% in the third quarter
of 2014, according to the most recent data available from the
National Retail Federation.
One reason malls have held steady: Merchants such as Tesla,
Apple and the like "show how the malls have stayed very relevant,"
says Alexander Goldfarb, a REIT analyst with Sandler O'Neill +
Partners.
High-tech tenants are a recent phenomenon. Over the past decade,
the number of Apple stores in North American malls has grown to 219
from just a handful. Microsoft has opened 70 store locations in
malls since 2009 and Tesla 25 since 2008, according to Green
Street.
In Bellevue, the affluent suburb east of Seattle filled with
large houses and a central business district with a host of shiny
new office buildings under construction, Bellevue Square is the
city's most prominent shopping center. The town's median household
income was $88,073 in 2012, about 73% higher than the national
median.
Tesla's $5,500 in sales per square foot last January shows how
lucrative high-tech tenants can be.
Yet it wasn't a fluke, says Kemper Freeman, chairman of Kemper
Development Co., the family-run company that has owned Bellevue
Square since it was built at the end of World War II. The store
also was the highest-producing tenant in the mall for the rest of
the year on a sales-per-square-foot basis.
Overall, including Tesla, the mall produced $1,071 in sales per
square foot for all of 2013, up from $842 in 2012, according to the
company. In its best-performing month in 2014, Bellevue Square's
Apple store produced about $1,500 per square foot, Mr. Freeman
said. Tesla opened its store there in November 2011, a year after
Microsoft opened its store.
Nationwide, the highest-quality U.S. malls produced $666 in
average sales per square foot in 2013, according to Green
Street.
Tesla isn't the only high-tech attraction at the mall. Last
January, sales at the mall's 12,000-square foot Apple Store matched
the same dollar volume as one of its largest anchors with more than
250,000 square feet of space. And three weeks ago, a store by
specialty photography brand Leica opened, selling digital cameras
for up to $22,000 apiece.
"In the old days, a few major anchors paid the rent," Mr.
Freeman said. "The inline stores are, at this point, subsidizing
the main stores."
Karen Busto, an executive at a company in Mexico City that
distributes automotive lubricants, visited the Tesla store with a
colleague during a shopping break on a business trip. She said the
store's mall location made perfect sense to her because it would
give the cars more exposure and allow curious customers to stop in
and learn more.
"Enthusiasts who love this kind of thing, for them it's
fantastic to have this type of store here," she said. "It's more
personal than going to a dealership."
Write to Robbie Whelan at robbie.whelan@wsj.com
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