Shoppers Prefer Staying Outdoors. That’s More Trouble for Malls.

National chains are accelerating their exit from malls for other types of retail locations, signalling more trouble for malls as consumers show a growing preference for shorter, more convenient shopping experiences.

Jewellers, shoe stores and other specialty retailers are among the operators making the shift, indicating they will continue opening at outdoor, non-mall locations such as grocery-anchored shopping centres and strip malls after finding that they perform better and typically save on costs.

“These retailers are going to grow more confident that they’re barking up the right tree as they continue to see quarter after quarter after quarter of outperformance in their off-mall locations,” said Brandon Svec, national director of U.S. retail analytics for data firm CoStar Group.

Bath & Body Works, which for years sold scented soaps and body creams to mall goers, is on track to open about 95 new locations for the fiscal year ending in February, while closing about 50, primarily in struggling malls. More than half of its 1,840 stores in the U.S. and Canada are now located outside of enclosed shopping centres.

Foot Locker said it is aiming to operate half of its North American square footage outside enclosed shopping centres by 2026, up from 36% in the third quarter.

Signet Jewelers, which owns brands such as Kay Jewelers, Zales and Jared, is closing up to 150 locations in the U.S. and U.K. by mid-2024, nearly all in traditional malls. Company executives told investors last year that off-mall locations had stronger sales margins, and about 60% of its total square footage is now outside malls.

Not all retailers are exiting from malls. Publicly traded mall owners Simon Property Group and Macerich, which primarily own higher-end centres, have reported record-high leasing volume over the past year as retailers such as Hermès, Warby Parker and Alo Yoga have taken space.

But foot traffic to U.S. malls was down 4% on average in 2023 from the prior year, and about 12% lower than 2019 levels, according to real-estate data firm Green Street.

Low-end malls have seen the biggest drops in customer visits, partially because department stores have closed in higher numbers at these properties since 2017.

Online-sales data have also helped retailers pinpoint locations for successful stores with better accuracy than in the past.

“You know where your customer is buying and where they live,” said Scott Lipesky, chief financial and operating officer for Abercrombie & Fitch. “We’re looking at this digital shipping data, and we just plop a store down in the middle of it.”

Recently, Abercrombie & Fitch has been opening in city shopping districts in an effort to get closer to younger millennials and recent college graduates.

Visits to outdoor shopping centres have increased since the pandemic as the rise in remote work has given people the time and flexibility to run errands more frequently and closer to home.

Outdoor shopping and strip centres also appeal to retailers who are increasingly allowing customers to pick up or return items bought online, CoStar’s Svec said. These shoppers want to get in and out of stores quickly, and not spend time navigating large parking garages or walking across the mall.

Increasing demand for open-air space has driven up shopping-centre rents to nearly $24 a square foot, the highest level since real-estate firm Cushman & Wakefield began tracking the metric in 2007.

But moving out of malls can still help retailers cut costs, particularly the common-area and maintenance charges that landlords pass on to tenants to help pay for the property’s upkeep.

Owners of enclosed malls are saddled with a host of additional expenses compared with open-air shopping centres, such as keeping the indoor walkways clean, repairing the heating and ventilation systems and maintaining the restrooms.

“It’s a lot more than blowing leaves out of a parking lot,” said Jim Taylor, chief executive of Brixmor Property Group, a real-estate investment trust that owns about 365 shopping centres across the U.S.

Taylor said he started to notice traditional-mall tenants moving into Brixmor centres several years ago. More recently, he has seen an increase in the types of retailers making the move, including those in the beauty, footwear, jewellery and housewares business.

“We’re seeing them come into the open-air centres because of the proximity and convenience to the customer,” he said.

The Reserve Bank had little choice but to raise interest rates again this week.

Inflation was already proving stubborn before the latest Middle East instability added further pressure to energy prices and supply chains.

Housing inflation alone has averaged six per cent over the past year, remaining one of the single biggest contributors to CPI.

But while the focus remains on rates, the deeper problem is structural and far more dangerous.

Australia is not building enough homes, and the conditions required to fix that are deteriorating simultaneously.

Construction costs remain elevated. Builders are increasingly unwilling to absorb contract risk. Labour shortages persist.

Capital is becoming more expensive. And as borrowing capacity weakens and sentiment softens, fewer projects are becoming financially viable.

The result is a self-reinforcing cycle.

The RBA raises rates to fight inflation. Higher rates reduce development feasibility. Fewer projects start. Housing supply tightens further. Rents rise. Inflation persists. The RBA raises rates again.

The only long-term solution is supply, yet Australia remains nowhere near the National Housing Accord target of 240,000 new dwellings a year.

Completion continues to lag approvals, meaning many projects approved on paper are simply never making it out of the ground.

That gap matters enormously because housing is not just another sector of the economy.

Around two-thirds of Australian household wealth is tied to property, while the sector underpins millions of jobs and related industries. Weakness here quickly spreads beyond real estate.

We are already seeing signs of stress. Auction clearance rates in Sydney and Melbourne have softened, borrowing capacity has declined, and parts of the market are experiencing price corrections as confidence weakens.

At the same time, policymakers continue to debate tax measures such as changes to negative gearing and capital gains tax discounts, despite fears that such reforms could drive private capital out of the rental market at precisely the moment when supply is most constrained.

This is the paradox at the centre of Australia’s housing crisis.

Demand for property remains extraordinarily high, yet the economic conditions required to actually build new housing are worsening.

The Reserve Bank cannot solve that problem alone.

Monetary policy cannot accelerate planning approvals, reduce construction costs or create more tradies. It can only raise the cost of money until something eventually breaks.

And increasingly, that “something” looks like the development pipeline itself.

Paul Miron is the Co-Founder & Fund Manager of Msquared Capital.

Shoppers Prefer Staying Outdoors. That’s More Trouble for Malls.

Bath & Body Works, Foot Locker are among retailers ditching malls for strip centers, other shopping outlets

Rising rates, construction inflation and shrinking investor confidence are pushing Australia deeper into a dangerous housing spiral that monetary policy alone cannot fix.