Part 3 of an SCT series lending insight into the year ahead

Rather than speculate about COVID-19 vaccinations covering the U.S. sometime in 2021, Macerich and its retailers need to focus on the approaches that have revived sales and traffic so far, says senior executive vice president of leasing Doug Healey. That means the steps that have given shoppers a sense of safety, choice and convenience. “Clearly, a vaccine is a potential game changer that could put people’s minds at ease,” he said, “but that isn’t going to happen overnight.”

For the third quarter, the owner of 51 million square feet of real estate, including 47 regional malls, reported a $22.2 million loss in net income, as diluted funds from operations excluding certain financing expenses declined by $49.8 million. Certainly, COVID-19 was having an effect. But the landlord also pointed to a raft of improving metrics. For example, by the end of the quarter, rent collections were back up to 80 percent of pre-pandemic levels and were trending higher, as were sales conversions. “Although our traffic isn’t where it was before COVID, our sales are back to 90 percent of pre-COVID levels,” Healey said in November, a few weeks prior to the onset of the next wave of infections.

It was a demonstration of pent-up demand that appears to bode well for what shopping patterns might look like once COVID-19 is under control. Macerich’s strategic decisions also played a role. After the first wave, the company installed high-grade HVAC and air-filtration systems at its malls and brought in an expert from UCLA Medical Center to advise on safety protocols. The marketing team got the word out about those changes, too. “We know we have the merchandise and the tenant lineups to get shoppers back to our centers,” Healey said, “but the only way that can happen is if they feel it’s a safe, clean, comfortable environment.”

For those positive third-quarter metrics, Healey also credits Macerich’s longstanding focus on upscale, high-productivity properties like Broadway Plaza in Walnut Creek, California; Virginia’s Tysons Corner Center, pictured below; and Arizona’s Scottsdale Fashion Square, pictured at top. “We started pruning our portfolio 10 years ago after the Great Financial Crisis,” he said. “We went from 80-ish centers down to about 51, and two-thirds of those are true A/A-plus centers. Today, we find ourselves in a pretty good strategic position.”

Over the course of 2020, retailers like New York & Co., Modell’s Sporting Goods, Barneys and Stein Mart shuttered their stores and liquidated their operations. But Macy’s, Chico’s, JCPenney, GNC, Sur la Table and others are rationalizing their real estate by closing underperforming locations and renegotiating leases to reduce occupancy costs. Although the realization came too late for some, Healey says, other retailers now see that their store fleets are too large. “It’s why you’re hearing from Gap and others that they’ll be closing 200 or 300 stores — whatever the number is — upon lease expiration,” he said. “They don’t need to be in every center. They need to be in the best centers. It’s a flight to quality that bodes well for us at Macerich.”

Amid an improving leasing environment in the third quarter, Healey’s teams signed 120 leases for 342,000 square feet, about triple the number of deals signed in the second quarter. At the end of the third quarter, they also had commitments or were in the letter-of-intent stage on about 90 percent of the square footage in Macerich’s portfolio for which leases were set to expire in 2021. Now, more retailers are talking with Macerich about new deals. “There are retailers out there that are being very savvy and opportunistic,” Healey said. “They’re using this time to jump on opportunities at centers where, because of our high occupancy, there hasn’t been space available for years.”

Read more from SCT’s 2021 look ahead series

The restaurant sector is planning for a comeback
Plan for omnichannel; don’t wait for certainty on 2021 shopping behavior
Faster and more collaborative style for retail real estate companies
Which chains will be expanding
E-commerce will face a reality check just like brick-and-mortar