By Esther Fung and Sebastian Herrera
The largest mall owner in the U.S. has been in talks with
Amazon.com Inc., the company many retailers denounce as the mall
industry's biggest disrupter, to take over space left by ailing
department stores.
Simon Property Group Inc. has been exploring with Amazon the
possibility of turning some of the property owner's anchor
department stores into Amazon distribution hubs, according to
people familiar with the matter. Amazon typically uses these
warehouses to store everything from books and sweaters to
kitchenware and electronics until delivery to local customers.
The talks have focused on converting stores formerly or
currently occupied by J.C. Penney Co. Inc. and Sears Holdings
Corp., these people said. The department-store chains have both
filed for chapter 11 bankruptcy protection and as part of their
plans have been closing dozens of stores across the country. Simon
malls have 63 Penney and 11 Sears stores, according to its most
recent public filing in May.
It wasn't clear how many stores are under consideration for
Amazon, and it is possible that the two sides could fail to reach
an agreement, people briefed on the matter said.
The talks reflect the intersection of two trends that predate
the pandemic but have been accelerated by it: the decline of malls
and the boom in e-commerce.
Malls were struggling for years, as more customers stayed home
to shop online. The spread of the coronavirus, which forced malls
to temporarily close and limited their crowds even after reopening,
has worsened the situation. Amazon, meanwhile, was able to navigate
new logistical challenges during Covid-19 and recently reported its
greatest quarter ever.
The talks reflect the intersection of two trends that predate
the pandemic but have been accelerated by it: the decline of malls
and the boom in e-commerce.
For Amazon, a deal with Simon would be consistent with its
efforts to add more distribution hubs near residential areas to
speed up the crucial last mile of delivery.
But for Simon, any deal to surrender prime space to Amazon would
signal a break from a longtime business model for malls: reliance
on a large department store to draw foot traffic to neighboring
shops and restaurants.
That model has broken down in recent years, as many department
stores are now fighting for their lives. Lord & Taylor also
filed for bankruptcy early this month, while Neiman Marcus Group
Ltd. filed in May. Nordstrom Inc. closed 16 stores in recent
months.
Their big-box spaces are typically more than 100,000 square feet
and often span more than one level. Smaller mall tenants have
counted on traffic to department stores to spill over to
neighboring retailers, and many have clauses that allow them to
reduce rents or break their leases if the department store stays
empty.
Having an Amazon fulfillment center could still trigger some of
these cotenancy clauses, but some landlords say even that scenario
would be preferable to keeping that yawning space vacant.
Still, Simon's other tenants might not celebrate a deal with
Amazon. Many blame the giant online retailer for severely
disrupting their business. Its presence as a new neighbor would
likely do little to pacify them, especially if Amazon's new
distribution capabilities in well-located Simon malls help make it
even more competitive by helping speed up its delivery times.
Amazon fulfillment centers wouldn't draw much additional foot
traffic to the mall, though some employees could eat and shop at
the mall. That is why landlords have preferred to replace
department stores with other retailers, gyms, theaters or
entertainment operators. Yet many of these tenants are struggling
to survive during the pandemic and aren't in expansion mode.
Simon would likely rent the space at a considerable discount to
what it could charge another retailer. Warehouse rents are
typically less than $10 a square foot, while restaurant rents can
be multiples of that. Depending on when the leases were signed and
their locations, department-store rents can be as low as $4 a
square foot or as high as $19 a square foot.
But Amazon's growth and healthy balance sheet would make it a
reliable tenant at a time when most retail business has been
waylaid by the pandemic. Simon, which owns 204 properties in the
U.S., has had to contend with a ramp-up in retail tenant closures
in recent years that has accelerated during Covid-19.
A hookup between Simon and Amazon would show how retail and
logistics -- especially delivery for the critical last mile -- are
converging more rapidly.
A number of U.S. malls are already doing business with Amazon,
such as renting parking lots to Amazon's huge van fleets. But for
Simon to lease a large, well-located indoor location would be the
rare instance of a major mall operator offering prime retail space
to Amazon.
"To replace department stores, mall owners considered schools,
medical offices and senior living," said Camille Renshaw, chief
executive officer of B+E, a real-estate investment brokerage firm.
"With the current pandemic, industrial is the only thing left
now."
Many retailers use their stores as mini-fulfillment centers to
speed delivery of online purchases, particularly since the pandemic
curtailed in-person shopping and curbside pickup became a new
alternative. Amazon would likely use the department-store space for
a smaller version of its huge distribution centers, relying on vans
to navigate suburban streets, analysts said.
Simon Property said it has entered into logistics ventures with
some retail tenants to help with their fulfillment needs. Mall
owner Washington Prime Group also has a new venture that leases
space to retailers such as Dick's Sporting Goods for inventory
clearance.
Malls' strategic locations often make them attractive as
distribution hubs. Many are near main highways and residences.
Amazon has already acquired the sites of some failed malls and
converted them to fulfillment centers. FedEx Corp. and DHL
International GmbH have done the same.
Amazon has also been in talks with multiple mall landlords about
putting its coming grocery-store chain in J.C. Penney locations,
according to a person familiar with the matter. Whether those
include Simon Malls couldn't be determined.
Simon and Brookfield Property Partners LP are putting in a joint
bid for J.C. Penney, which filed for bankruptcy in May. Taking over
the department-store chain would give them control over the store
space and certain rights such as making changes to the parking
structure, exits and access to shared space and roads.
Write to Esther Fung at esther.fung@wsj.com and Sebastian
Herrera at Sebastian.Herrera@wsj.com
(END) Dow Jones Newswires
August 09, 2020 19:36 ET (23:36 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.