There is a phenomenon occurring that is changing the social and economic structures of communities across the USA. Thousands of malls are now on life support or have already been declared dead.
The reasons are many, the obvious one that comes to mind is on-line purchasing with companies such as Amazon. However, one fact remains, on-line purchases only covers less than 10% of all consumer purchases. I believe that the real reason the malls face extinction is based upon the fact that consumers are all “maxed out.” After the 2008-2009 economic collapse the government forced interest rates down to artificial lows and forced trillions of dollars in continuous liquidity injections from the central bank. This allowed consumers to increase their debt loads to a point of no return. Remember that injections by the feds is just another method to borrow money, spend now and add debt repayment obligations for current and future tax payers to bare. With the addition of rising rents, increased cost of living, tax burdens, unsustainable public debt loads, and a stagnation of wage increases, the middle-class consumer has been pushed to a breaking point. With consumers having so little “disposal” income left to spend, the need or the want to drive to a shopping mall has dramatically decreased.
It is estimated that 1 in 5 of all retail malls will close over the next 5 years. The once vibrant destination malls have become a blight on many local communities. The major tenants that draw shopper traffic which helps feeds the smaller tenants is no longer working as it did in the past. As the major shops close, the smaller retailers will close too. The even smaller mom and pop shops are squeezed to death and ultimately will have to close a business they worked their whole lives to create. This is a terrible situation that is not going to be solved any time soon.
Metro and suburban areas are less affected because there is redevelopment potential. The possibilities to reconfigure a property into another use based upon adequate population with economic strength and with an employment base to absorb homeownership purchases or tenancy. For example, taking a local shopping mall, scraping it, and replacing with mid-rise condominiums or apartments with possible retail space on the ground floor. Such a reconfiguration may make economic sense, with new vitality and increased tax receipts for the community.
As malls and centers vacate wear and tear will take its toll, including vandalism and physical deterioration. Many of these properties will become a blight on the neighborhoods with city officials demanding that the property owners keep up the maintenance and the cosmetic appearance of the structures. In many cases the property owner does not have enough economic strength. A downward spiral will continue, including the city recording a notice of substandard condition. The city may demand that the property owner spend money to keep up the appearance of the property even if it has been abandoned by its tenants. If the owner does not have the money for the upkeep the city will act. A lien will be attached, thereby clouding the title, and becoming a future obligation of the owner.
For the geographic areas further away from adequate population the solutions become dramatically more difficult. As mom and pop service providers go out of business, smaller communities do not necessarily have the population base to absorb the square footage for almost any alternative usage. This process also exists for localized economies that never recovered from the great recession.
This entire spectacle will only accelerate as interest rates rise. All forms of debt will become more expensive. Imagine the social an economic outcome as interest rates rise a full 1 or 2%. Over the long-term the government cannot dictate artificially low interest rates, reflecting low borrowing cost, without creating a massive upward inflationary spiral an increased cost of living for all.
With government involvement, here is a list of consequences of this downward spiral:
1) Property taxes may accrue to a default status, this will result in eventual tax sale foreclosure and transferring the property to the municipality. In many cases the municipality wants to take away private ownership for redevelopment and making a profit, thereby adding to the municipal tax base. If the municipality takes ownership and sells to a new developer, the expectation would be an increase in all forms of taxes.
2) Increased government regulation and fees for any possible redevelopment or repositioning.
3) Municipalities may attempt imposing rent control to both existing and potential redeveloped properties, that may add stress to the economic viability of the project.
4) Expanding forfeiture by owners to government agencies who violate codes and regulations.
5) Future efforts to undo Prop 13, a proposition that caps your property taxes to 1.25% based upon purchase prices, plus an annual bump.
6) Imagine the effect on commercial property if taxes all the sudden doubled, tripled, or even more in some cases.
Solutions for smaller malls in more rural areas, may create more need for government-backed land banks. Municipalities who take ownership and possession may work with quasi-public/private partnerships for redevelopment sometime in the future. Retail investors seem to be losing interest in purchasing vacant, and possibly rundown mall properties at any price. What is the value of dirt, with limited uses in the foreseeable future?
The growth rate of on-line shopping is accelerating at lightening speeds. In 2018 the online shopping percentage is at 10%, assuming a 2% additional growth and other compounding factors by the year 2025 the percentage could grow to 25% or higher. With the additions of autonomous vehicles, Uber style delivery services, on-line grocery delivery and almost every other “need” being available online and delivered to your door, all of us are helping to accelerate the need for brick and mortar stores.
Imagine a day where you wake up, do your daily hour workout, take your shower, and sit down at your laptop to order your groceries. You select the exact time you wish them to be delivered at your front door. In the late afternoon you open a fine bottle of wine that you also ordered conveniently online. You visit the Uber Eats website and enjoy the delivery of a full course meal delivered to you in under 30 minutes, you “finally” sit down to relax to the pleasure of news on Fox, CNN, or MSNBC depending up on your political persuasion.
During that one calendar day, you saved gas, parking, waiting in lines, not to mention a chance of being caught by the pesky radar police officer who waits patiently to zap you while you rush to get to the restaurant on time to meet friends. You didn’t have to deal with waiters, no tips, no waiting for the check to come in the overly crowded and noisy restaurant. You also get to skip the nerve-racking drive back to your home after your one glass of wine. Of course, you only had just one!
We all look forward to a future where you decide to go visit the sports bar for some entertainment. You call for an autonomous vehicle who promptly arrives in 5 minutes to pick you up and take you to your destination. As you sit down in your ride your iris is scanned, your autonomous driver says, “how are you today Fred Rogers?” You engage in a short conversation with the robotic driving mechanism; You don’t give a second thought to the fact that there isn’t a human being driving the car. Upon arriving to the sports bar, you are greeted with fully reclining seats. A robot bartender shows up and scans your iris for verification, quickly gathering all the “data” it needs to complete the transaction. The robot goes by the name “Frankly.” He says, “how can I help you today Fred? Will it be your usual order?” “Not today Frankly, I’ll have a pitcher of Stone IPA please with 2 cold mugs.” The other mug is for the girlfriend that Fred invited to meet him at the bar. Frankly, says to Fred, “Fred aren’t you going to introduce me to this beautiful young woman” ‘Of course, Frankly, this is Lola Beasley.’ Frankly the robot quickly scans her iris for acceptance and compliance. Frankly serves the pitcher of cold beer, 2 mugs and greets Lola. The evening went well, and all were thoroughly entertained and lived happily ever after. The bill was paid through Fred Rogers iris scan, directly drawn from his on-line account. Cash is obsolete and there is no need to bring your wallet anywhere you go.
The future of shopping malls and retailing landscape is changing rapidly. I predict that there will be a tug of war between two types of people. The people who enjoy cocooning at home vs the ones who enjoy going to a destination mall for entertainment, and recreation. Perhaps the later will be the knights in shining armor to save the brick and mortar malls.
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