How American malls survived the slow death of department stores

The American mall is alive and well.

Department stores — which were historically the most important real estate in the nation's malls — are a different story.

Department stores are struggling to compete against new online direct-to-consumer competitors and smaller brick-and-mortar retailers that have been able to keep up with the ever-changing demand of consumers. That struggle has forced store closures at familiar retailer names like JCPenney, Sears and Macy's, the latter of which recently announced it would close up to 150 stores.

"The ones that are closing are underperforming or have lost their own way with the customer," said Michael Guerin, EVP of leasing at Macerich. "The brand is not working for one reason or another. So it's hardly impactful to us when you have an obsolete situation or a brand close."

Top-tier malls, known as Class A malls, are pivoting toward an experiential model, replacing department stores with grocery stores, casinos, gyms, ice skating rinks and, in some cases, even residential apartments.

The shift in strategy has been working. Mall traffic has bounced back to near pre-pandemic occupancy levels, with customers embracing the experience-focused model. Mall owners are also capitalizing on the omnichannel strategy bolstering stores' online presence in addition to their brick-and-mortar stores, creating a halo effect for retail sales.

All malls aren't created equal, however. Lower-tier malls are feeling the effects of department store closures more acutely as inflation and economic pressures increasingly split consumers into two categories: luxury shoppers and discount shoppers. That's also causing a split in the fortunes of America's oversupply of malls, with affluent consumers flocking to higher-end malls, bargain-hunting shoppers heading to strip malls, with business declining in the middle tier.

"Those who are calling for the demise of the mall might have been premature. But stepping back, there are probably still too many malls in the country," said Haendel St. Juste, senior REIT analyst at Mizuho Securities.

Watch the video above to find out more about how malls survived the death of the department store.