- October 1, 2021: Vol. 8, Number 9

Shopping mall performance in an era of retail evolution

by Thomas LaSalvia and Ermengarde Jabir

With increasing competition from ecommerce, the ecology supporting the economic performance of regional malls has changed significantly. The existing infrastructure was built for a shopper and an era that no longer exists. Consequently, we expect distress to manifest in the near- to mid-term closure or repurposing of 15 percent to 25 percent of the existing 1,000 mall properties still operating within the United States.

The national-level mall vacancy rate is currently a shade under 12 percent. While this record level shows general distress in the sector, there is vast differentiation at both the geographic and property levels. Not all properties will fail, and some may even thrive in this new era of retail. Using a combination of our internal database of property-level data and our CMBS data, we find greater levels of distress in slower-growth metros in the northern U.S., as well as within older, smaller properties in less affluent submarkets across all metropolitan areas. With this said, the idiosyncratic nature of outlier properties in our data does suggest that owners and operators can still influence how space is used, and whether their specific property can compete effectively in a changing retail environment.


General retail performance during the past decade has been less than stellar. The vacancy rate has moved from a long-term average in the range of 5 percent to 6 percent up to a current average of about 10 percent. During this same period, rent gains have lagged nearly all other commercial real estate sectors. Development has also faded; construction activity has been modest over the previous few years and completions are on pace to hit a record low in 2021.

Ecommerce is the main cause, but this isn’t the whole story. As a share of total retail sales, ecommerce has risen steadily since the early 2000s. After hitting nearly 16 percent during the pandemic-induced lockdowns, the rate has fallen slightly; but moving forward, we expect the share to hit or exceed 20 percent sometime this decade.

Consumers have certainly exhibited a willingness to purchase goods online and the pandemic has ripped the bandage off for others who previously had been skeptical. This experience, especially if positive, has snowball-like ramifications for further acceptance and growth of ecommerce. When an individual commits to purchasing a particular item online, the decision calculus is altered for in-person shopping more generally as well. A retail cluster or a mall loses part of its multiple-trip-saving value if the number of different goods bought in close proximity at different stores declines. In theory, the value-add of a retail cluster can become eliminated and cause a consumer to switch fully to online shopping. This stylized example is likely too extreme, but the takeaway holds. A rise in ecommerce produces a snowball-like effect by reducing part of the value a shopper experiences by going to a retail cluster. The consequence is fewer shoppers who make fewer trips, resulting in more pressure on retail real estate, especially malls.

While the above theory produces a very negative outlook for the sector, we can actually utilize the same theoretical structure to explain why not every location must necessarily suffer the same fate in this new era of retail. It is very likely that there will be products that consumers will not want to purchase online. If a retail location contains a large number of these particular products/stores, shoppers will be most incentivized to use that particular location rather than making multiple trips to multiple destinations. If enough of these shoppers exist, the area succeeds at being a “destination,” which can further increase its appeal. This is truly a critical mass problem which acts to separate the performance of retail properties; leaders and laggards will emerge. Shoppers, who in an ecommerce era likely make fewer trips to the store, will be more apt to bypass “local” small malls and instead look for the most suitable “destination” properties for their quarterly or semi-annual outing.

In addition to ecommerce, migration shifts have also affected mall performance, resulting in differentiated patterns of mall ecology in each area. Generally, with less geographic and legislative development hurdles in the South, these cities have tended to grow outward rather than upward. Newer developments on the periphery of the city are often inhabited with middle- and high-income households. As these periphery areas have been populated by these demographics, many retail clusters, including shopping malls, have been constructed. Given the era of these developments within the past two decades, many of the shopping mall projects have been built with at least some anticipation of the additional competition that ecommerce has brought. This has generally resulted in larger and more “destination-like” characteristics, putting these malls in a better situation to succeed even in a post-pandemic world.

As for older, slow-growth metros, there are two major differences worth discussing. One, outward development is minimal in these cities and, two, inventory growth in the sector was almost exclusively conducted prior to ecommerce being thought of as a significant competitor. Due to this combination, there is a larger percentage of struggling malls in these areas. The smaller scale, “local” properties are finding it difficult to compete in an era of fewer trips per household. The slow-growth metros are oversaturated. In our sample of nine geographically diverse metropolitan areas, the four northern industrial-type cities (Cincinnati, Chicago, Philadelphia and Baltimore) have the largest percentage of high-vacancy properties.


The retail evolution is helping to sort leading and lagging assets within any given market. To assist in better understanding this process, we utilize property and location characteristics to model their relationship with property-level vacancy rates. We find the malls facing less current stress are, on average, larger, newer and in more affluent retail clusters with a diversity of shopping and entertainment experiences. Consistent with theory, older, smaller, “local” malls tend to be struggling at a disproportionate rate.

Digging into the specifics of the model, various components of the Moody’s Analytics Commercial Location Score were used to test the importance of location “quality” as it relates to property performance. Both economic prosperity and spatial demand scores, which can act as proxies for the wealth and vibrancy of the area, are found to be statistically related to lower vacancy rates. This outcome aligns with the theoretical necessity of a “destination-like” location characteristic for a property’s success.

Additionally, we categorize properties based on tenant type (luxury brands, mass appeal, general necessities) and then segment by age to gain further insights. The results indicate that higher-tier and newer malls, those which are typically better maintained, larger and with a greater variety of tenants, including upscale tenants, are found to have significantly lower vacancy rates, particularly for anchor space. Both location quality and property-specific characteristics are important factors.

In short, the American shopping mall is, in fact, not dead. The in-person shopping experience that consumers seek, particularly for experiential, trendy or higher-cost goods, cannot be replicated via ecommerce. Given this, we expect a further evolution of both the spatial relationship among malls and to the mall itself.

We predict about 20 percent of malls, probably more in the oversaturated North, are likely to be renovated, repurposed or razed to make way for a different property type. The remainder will be able to survive if they are well located and maintained to a high standard to attract a mix of quality and on-trend tenants necessary to create a critical mass.

As for repurposing, there are an abundance of arguments for using old retail space to alleviate workforce housing supply issues or for industrial purposes, but these are large undertakings that require major financing and, in some cases, rezoning by local authorities. Instead, a likely short- to mid-term solution may be in the medical space. Historically, many malls have counted vision care and dentists as tenants co-existing with traditional retail.

With an aging population and an increasing need for medical practices, some of these older malls may have a new life as medical clusters coexisting alongside a few remaining retail tenants. Indeed, even many of the “laggards” may find a new and worthwhile purpose.


Thomas LaSalvia is senior economist, and Ermengarde Jabir is an economist at Moody’s Analytics. For a deeper look at the performance of retail assets, visit Moody’s Spotlight on Retail content hub at this link:


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