Regal Cinemas — Amazon-proof?
  • Regal Cinemas — Amazon-proof?
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Fifty years ago, shopping malls were the local gathering places. Days and nights, they were jam-packed with people of all demographic groups. But by 2014, almost 20 percent of American malls were considered in trouble — that is, they had vacancy rates of 10 percent or more. It has gotten worse., the website devoted to the topic, says that a dead mall is one having an “occupancy rate in slow or steady decline of 70 percent or less.” And the website lists them by the dozens, although none is in San Diego County.

Horton Plaza. Important retailers started deserting it not long after it opened. A huge part of it has been ripped down.

Horton Plaza. Important retailers started deserting it not long after it opened. A huge part of it has been ripped down.

On May 31, the big bank Credit Suisse predicted that 25 percent of malls would be gone in the next five years. Earlier forecasts had also been dire, and results prove them to have been accurate. Malls used to be anchored by big department stores — Sears, JCPenney, Macy’s, and the like.

San Diego's Realty Investment Corp. success chart. It is not into malls. It buys freestanding, single-tenant properties. (Click to enlarge)

San Diego's Realty Investment Corp. success chart. It is not into malls. It buys freestanding, single-tenant properties. (Click to enlarge)

All are now in deep doo-doo and closing stores, upsetting the malls that relied upon them as consumer draws and sources of revenue. The smaller mall stores, which pay higher rent per square foot than the anchors, are having trouble, further biting into mall revenue and traffic.

Much of this is tied to the American economy. For several decades, income growth has gone mainly to the rich and superrich, while the middle class has shrunk. Malls that appeal to the middle and lower-middle classes are hurting. San Diego has a good example of that economically ruinous trend.

Stores least vulnerable to internet competition.

Stores least vulnerable to internet competition.

Australia-based Westfield Corporation has five local malls — UTC, Plaza Bonita, North County, Horton Plaza, and Mission Valley. Westfield UTC, near hyper-upscale La Jolla, has been undergoing an expensive redevelopment since 2012. A second phase of the development will be opened this fall, featuring new cinemas and an expanded food court.

On the other hand, Horton Plaza downtown is a disaster. Important retailers started deserting it not long after it opened. A huge part of it has been ripped down (at taxpayer expense). It has never attracted an upscale clientele, although the Union-Tribune has not stopped referring to it as a great success of public-private projects, or corporate welfare.

Early this year, Macy’s, an anchor of Westfield’s Mission Valley mall, announced it was closing its store at the center. The closure was part of a nationwide shuttering of stores producing unsatisfactory revenue.

“Last year was a terrible year for brick-and-mortar retailers as layoffs and bankruptcies climbed. But 2017 is shaping up to be even worse, particularly for those located in a mall,” says, a website that combs through companies’ reports to the Securities and Exchange Commission. “Since the start of this year, an alarming number of companies have been making references in their filings to ‘mall traffic.’” Almost always, that is declining mall traffic as a risk factor hurting earnings. The companies that seem to be most afraid of mall-traffic trends are clothing retailers such as Abercrombie & Fitch and food merchants such as Buffalo Wild Wings. (San Diego’s Jack in the Box does not list mall traffic as a risk factor because it has few outlets in malls.)

Now, the battle lines are drawn: it’s the brick-and-mortar retailers versus Amazon or other online operations. A brick-and-mortar retailer losing business to an online merchant is said to be “Amazonned.” The Credit Suisse study forecasts that by 2030 online apparel sales will be 37 percent of the total, more than double today’s percentage.

The companies in the most trouble are the real estate investment trusts that own bundles of shopping malls. Their stocks have been clobbered by 40 percent or more.

There is one real estate investment trust that is sometimes called “Amazon-proof.” It is San Diego’s Realty Income Corp., which, according to Ian Bezek of, “is arguably the world’s most popular real estate investment trust.” It was founded in 1969 with the purchase of one Taco Bell outlet. Its aim is to produce a steady flow of monthly dividends to investors.

The company is not into malls. It buys freestanding, single-tenant properties, such as a drugstore on a corner. Eighty percent of the properties are in retailing, but the major ones should not be hit by e-commerce. The top ones are Walgreens, 6.8 percent of volume; FedEx, 5.4; Dollar General, 4.1; LA Fitness, 3.8; and Circle K, 2.6. However, “Realty Income’s properties are vulnerable to potential secular shifts within its major industry concentrations,” warns Edward Mui of Morningstar. For example, how will its drugstores react to changes in Washington DC’s proposed new health-care programs? Amazon is considering going into prescription drug delivery. Will folks watch all their movies at home?

Realty Income’s stock climbed to $72.30 last year, greatly because it lacks mall exposure, but has sunk into the mid-$50s this year. Many of its large tenants, such as Walmart and CVS Health Corp., are considered less vulnerable to Amazon. Realty Income has returned 17 percent a year compounded (including dividends) since 1994 and has paid 563 consecutive monthly dividends. That’s great, but, “as the recent news about a potential Amazon Pharmacy reminds us, very little is safe from e-commerce at this point,” says Bezek, and Realty Income’s retailers are brick-and-mortar. Compared to its peers, Realty Income stock is very expensive. Bezek would buy the stock if it gets below $50. Standard & Poor’s has lowered its target for the stock to $62 from $65 and would only hold the stock.

Mergers are muddling the bricks-and-mortar picture. On June 16, Walmart said it will acquire e-commerce apparel retailer Bonobos. The same day, Amazon said it is acquiring Whole Foods. Amazon’s food business has been slow to develop, and now, say analysts, it could soar.

Achilles Research says that Realty Income is “widely seen as the best commercial real estate investment trust thanks to its high quality of earnings,” but despite the company’s splendid historical record, it’s “far from being a bargain,” even though the stock has dropped sharply. The market overall is too high, and stocks paying good dividends are vulnerable. Achilles would also wait until the stock hits $50 to nibble.

Realty Income officials just came back from an analysts’ meeting in New York. The San Diego company feels the drop in its stock is a reflection of rising interest rates. It feels that its top 20 tenants are shielded from online competition. As to Amazon’s rush into the drug business, Realty Income notes that online drug sales peaked at 20 percent of industry sales in 2010 and are now down to 11 percent.

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Ponzi June 28, 2017 @ 9:13 a.m.

If the Amazon-effect trickling down into mall failures doesn't put pressure on Realty Income, rising interest rates surely will.


Don Bauder June 28, 2017 @ 3:40 p.m.

Ponzi: Rising interest rates would certainly hurt Realty Income. In fact, the company blames the recent decline of its stock on rising rates, or anticipation of rising rates.

The Fed has nudged up short rates a little bit (from, effectively, zero), but how far will it go? Some economists want the Fed to jack rates up toward normality, but I'm not sure that is going to happen. The economy is not strong, worldwide and in the U.S., and public and private debt is so high that higher rates might cause havoc. Best, Don Bauder


Don Bauder June 28, 2017 @ 3:44 p.m.

Mike Murphy: That has been suggested, and it's a good idea. It could be one solution to the homeless problem. Best, Don Bauder


Don Bauder June 30, 2017 @ 7:28 a.m.

Murphyjunk: Good article. A related subject: abandoned churches are being turned into homes or offices. Best, Don Bauder


Don Bauder June 30, 2017 @ 7:33 a.m.

Shimizu Randall: Yes, the low interest rate policy launched in early 2009 (bringing short rates down to almost zero) has caused a lot of distortions in the economy. Stock and bond markets have risen inordinately. Once again, housing is becoming a bubble. But there are big losers: those saving in a bank or S&L, for example. There is too much money and credit floating around, and we will pay for that. Best, Don Bauder


Visduh July 1, 2017 @ 3:53 p.m.

One small point of clarification: Macy's closed one store in Mission Valley Center, but that didn't mean it had left that center. As in a number of malls, it ended up with both a former Broadway and a former Bullocks there. They ended up, usually, putting the home store and the men's departments in one of the locations, and the rest of their offerings (mainly the women's) in the other. My recall is that the store they closed had originally been Broadway.


Don Bauder July 1, 2017 @ 9:25 p.m.

Visduh: I should have said that Macy's closed its apparel store in Mission Valley. I will take your word for the former Broadway and for Bullocks still not closing at that time. Best, Don Bauder


Darren July 1, 2017 @ 10:25 p.m.

Good article Don, thanks. And the Sears in UTC is scheduled now to close.


Visduh July 3, 2017 @ 8:29 a.m.

That move by Sears had me scratching my head. They're in the strongest and most popular mall in the county, one now undergoing massive upgrading, and they decide to leave. My only take is that the mall operator was going to raise the rent on Sears, perhaps massively, and Sears just decided it could not afford to stay. And then there's another possibility that Sears wasn't benefiting from the popularity of the mall. If Sears could make use of all that traffic, they would be inclined to stay. The type of customer that patronizes UTC is likely not the type of customer that likes Sears or its offerings.

I find that move right up there with the decision of Nordstrom to pull out of Horton Plaza. Who'd a thunk it before it happened?


Don Bauder July 2, 2017 @ 1:11 p.m.

Darren: Yes, Sears Roebuck is dying. I would like to expand on that.

I grew up in a suburb of Chicago. Many of the fathers were executives at Sears. Some died early because of the pressure. Noneteheless, in those days, Sears was God Incarnate.

Beginning in 1964, I was a reporter/writer in the Chicago bureau of Business Week Magazine. It was the same. Sears was God, or thought so. When Sears answered our queries we felt we had done something noteworthy. The Mighty Sears bowed to no one, including the media.

Then along came K-mart, followed by Wal-Mart. Sears is a shadow of its former self. Ditto K-mart. Don't be surprised if one or both go under. Best, Don Bauder


Don Bauder July 3, 2017 @ 8:47 a.m.

Visduh: Your suggestions of why Sears is leaving UTC are good ones. Possibly the explanation lies in Sears's overall weakness. Best, Don Bauder


Visduh July 3, 2017 @ 10:06 a.m.

Don, As we've previously discussed, Sears sold off literally everything it had that was successful in order to raise cash to keep its retail operations going. I've seen other corporations do something just like that, and it never made sense to me. Rather than try to keep its declining stores going in an ever-more-competitive economy, it should have kept its other assets, and gone out of the retail business. Had that approach been taken, today Sears would consist of (among other things) Allstate Insurance, Discover Card, Coldwell Banker, Dean Witter, Craftsman tools, Kenmore Appliances, and a few lesser operations. All of those could be prospering and succeeding today.

In case you forget, Sears stores and K-Mart stores are operated by the same company, Sears Holdings. Both Sears and K-Mart went BK some years back, and the entity that emerged from the wreckage is Sears Holdings.


Don Bauder July 3, 2017 @ 10:24 a.m.

Visduh: Yes, a Wall Street hotshot put Sears and K-mart together more than 10 years ago, as I recall, but the idea flopped. Wal-Mart was too much competition for both.

You are right that Sears sold off its winners to keep its loser (retail) afloat. I don't understand that strategy either. Best, Don Bauder


Ponzi July 3, 2017 @ 12:11 p.m.

While Amazon was becoming an e-commerce mega-store, K-Mart went on to buy Borders Books, Sports Authority, Builders Square and Office Max. Trying to become a bigger brick and mortar force. But most of those acquisitions failed and then K-Mart and Sears agreed to merge and renamed the combined companies Sears Holdings. Things continue to deteriorate for them.

This is a story consistent with the theory of the "wheel of retailing."


Visduh July 5, 2017 @ 9:36 a.m.

That "wheel" concept always seemed to me to be rather textbookish, but it does appear to describe the life cycle of retailers. A few have defied it, but in the main it goes that way.

I'd like to add that K-Mart also bought Pace Membership Warehouses while on that acquisition binge. Pace was one of many Price Club clones that popped up regionally in the early 80's. While Pace started in the Denver area, it was actually a San Diego operation, with the initial investments and the personnel being local here. Its founder was Henry Haimsohn, who is related to the Haimsohn family that operates Lawrance Contemporary furniture in Hillcrest and Encinitas.


Don Bauder July 3, 2017 @ 6:51 p.m.

Ponzi: Sports Authority paid to have its name on a pro stadium somewhere. Then the company fell apart and the name came off the stadium. The retail book business is having difficult times. Independent bookstores are making a bit of a comeback, but Borders, a chain, failed. Best, Don Bauder


Don Bauder July 6, 2017 @ 9:05 a.m.

Visduh: A book should be written about the latter-day stupidity of Sears, K-mart, and the combined Sears and K-mart. You could do it. You know retailing. Best, Don Bauder


Darren July 6, 2017 @ 9:54 a.m.

I predict Dick's Sporting Goods will be the next casualty. It is sad to see the many people losing their jobs when these retail outlets shutdown. A big part of the problem too is our asset bubble and over-valued land/leases/rents. When biz owners tell me their commercial lessees just went up 150% for the new annual lease, no wonder so many retail/office spaces are closing. I do see many more 99 Cents Only Stores and Dollar Trees opening, which might reveal the true demographic of the "working class" and/or middle-class. Though don't mention to radio host George Chamberlin the asset bubble, because last week he said anyone who believe we are in one, is "brain dead." George is the business/economics/stock market/real estate "expert" on radio.


Don Bauder July 7, 2017 @ 7:08 a.m.

Darren: We (and many of the industrial countries) ares in a money and credit bubble brought about by zero short term rates (now a bit higher), central bank efforts to bring down long rates, wrapped up in quantitative easing. The central banks say they want to bring interest rates back up to normal very slowly. Goodness knows, it can't be done quickly. The U.S. Federal Reserve has trillions of dollars in bonds it bought to bring down long rates. It says it wants to get those bonds off its books over a long period of time. Europe wants to stop quantitative easing.

It will be interesting if either of these things happen. It may just be talk. Best, Don Bauder


Darren July 7, 2017 @ 4:44 p.m.

Thank you Don...good observations/explanation on your part! I meant in my above reply to say 'lease' not "lessees". The central bankers are the high priests these day, and we must pray they keep this system afloat, because the alternative would be rather difficult (severe) for a long time, though way down the road, it might give rise to an even better system. Ever see the 1981 movie Rollover? Here's a clip: Take care Don.


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