Brookfield Sees Profit In Morphing Malls Into Distribution Centers
The potential for struggling shopping malls to become distribution centers for online retail orders has been much talked about, but few such conversions have actually taken place to put theory to the test. Now Brookfield has put some meat on the bone of how this is working in practice and some of the financials that are making it work.
In full-year results for 2020, Brookfield Property Partners, the $78B listed property giant managed by Brookfield, outlined how it is looking to capture some of the revenue generated from online sales in its brick-and-mortar mall portfolio.
Brookfield Property is one of the world’s largest shopping mall owners, following its acquisition of the assets of General Growth Properties. It owns 121 malls across the U.S. totaling 120M SF and valued at around $33B.
The performance of the malls has been hit hard, due to retailers shutting stores and reducing rents as a greater proportion of retail moves online, a trend that has been hugely accelerated by the pandemic.
Brookfield said it could grab a piece of the online pie in two ways. Firstly, it said it is seeing retailers fulfill a greater proportion of their online orders from stores rather than specialist logistics space. It pointed to Dick’s Sporting Goods, which said in third-quarter results in November that during the period it fulfilled 70% of its online orders from its stores.
“While the showroom area of the store may shrink, retailers are using more space for inventory, returns and fulfillment, making the distribution channel itself less relevant but the location of its physical real estate more important than ever,” Brookfield Property Chief Executive Brian Kingston said.
The second, related trend is Brookfield converting parts of its malls into mini distribution centers its retail tenants could rent out and use to fulfill online orders. This is allowing it to convert and use low-value and hard-to-lease space.
“Oftentimes for these fulfillment centers they're in, I'll say the lower-value ends of the malls, whether that's an old department store box or otherwise it was not your prime customer-facing areas of the mall, and so being able to utilize those underutilized areas is actually accretive,” Kingston said.
Kingston said the economics are making it more attractive for retailers to take more space in malls rather than specialist warehouse space because the delta between retail and warehouse rents has shrunk.
Speaking generally, he said that five years ago, urban logistics rents were 50% below shopping mall rents. Today, they are about 15% below. When you account for the fact that shopping malls tend to be closer to where people live, making transportation costs from them lower, then that gap narrows even more.
“So, from our perspective the economics of putting this shared fulfillment, or evolving our centers to be more directly facing on One Channel [Brookfield’s name for retailers blending online with brick-and-mortar retail] is net positive economic on the rents,” Kingston said.
Whether fulfilling online orders from stores or these mall distribution centers, the trend should put a floor under mall occupancy levels, he said.
There are several examples of Brookfield merging online order fulfillment with traditional retail space at its malls.
Due to an increase in online demand, the Macy’s at Southwest Plaza in Littleton, Colorado, is temporarily closed to in-person shoppers and has been converted completely to a fulfillment center. This is part of a pilot program to address changing shopping behavior brought on by the pandemic. Shoppers are still able to make returns and pick up online orders.
At Fashion Show mall in Las Vegas, DropIt offers hands-free shopping, pulling inventory from stores at the center based on online or phone orders. Purchases are then delivered to the shopper’s hotel or home. DropIt has also partnered with Brookfield at both Fashion Show and Park Meadows on running product between the store and curbside delivery.
At Paramus Park in New Jersey, Brookfield partnered with Fillogic to create efficiencies for tenants by consolidating packages from in-store fulfilment tenants. Fillogic collects packages from the store and consolidates them at a centralized location for pick up by UPS.
And at the Westlake Center in Seattle, an agreement between Brookfield and Bootworks means Bootworks can deliver and receive packages as a service to the mall. It is renting a parking space in the garage for a storage pod. It is now growing this platform — it recently signed a lease at the Alderwood mall in the city with a targeted launch date of Feb. 2 and is looking to expand to Portland, Oregon, as well.
Of course, there is no silver bullet for malls, as Brookfield’s results showed. The value of its mall portfolio was written down by $2.5B in 2020, and only half of the space that became vacant as retailers went bankrupt has been re-leased. But trying to tap into the juggernaut of online retail growth is one of the strategies it thinks will be required to stay profitable.