Crystal Mall in Waterford, Connecticut is what industry experts call a “Class B” mall. Johnny Milano/Bloomberg

Retail Bankruptcies Will Push Mid-Range Malls Over the Edge

By Madeleine Ngo, Christopher Cannon, Jordyn Holman and Drew Hutchinson

August 27, 2020, 5:00 AM EDT

Most Americans have never been to Crystal Mall, nestled between a stand-alone Target and a sprawling Home Depot on a nondescript four-lane turnpike that could be anywhere.

And that’s just the point: This two-level shopping center in Waterford, Connecticut—with its disappearing department stores, bankrupt retailers and landlord trying to prop up its own tenants—could be just about any mall in the U.S. Similar to the hundreds just like it across suburban America, this mall is in crisis, and there might not be a way out of it this time around.

Crystal Mall is what industry experts call a “Class B” mall—not the gold-standard Class A kind that are expected to make it out of the current recession fairly unscathed or the Cs and Ds whose days are almost certainly numbered. With their middle-of-the-road sales productivity, mix of national and regional tenants and one or more anchor vacancies, Class Bs are right in that gray area: Some will weather the storm, but many won’t.

More than 300 malls in the U.S. are categorized as B malls, according to real estate research firm Green Street Advisors. Some analysts rank malls based on their sales per square footage—with A malls making more money than their lower-ranked counterparts—though those divisions are often more fluid. One clear way to think about it is a B mall would be, say, the third-best mall in a five-mall town, Green Street says.

Crystal, which is owned by Simon Property Group Inc., was built to house four anchor tenants, or the massive chains meant to draw broad foot traffic into the mall. Sears already closed its doors there after filing for bankruptcy in 2018. That leaves two other department stores—J.C. Penney Co. and Macy’s Inc.—with Christmas Tree Shops and Bed Bath & Beyond sharing the remaining anchor spot.

Crystal Mall currently has 80 stores, if you use a loose definition of stores that includes restaurants and an inflatable kids play space. In 2018, Sears—one of the mall’s anchor stores—filed for bankruptcy and closed its location here.

Six retailers currently in the mall have filed for bankruptcy in the last three years, or seven stores if you count Claire’s and Icing from the same parent company as two.

Other retailers located in this mall are distressed, though not bankrupt.

Even some retailers who aren’t distressed have announced plans to voluntarily close hundreds of stores across the U.S. to trim costs. These retailers haven’t said if they’re closing the Crystal Mall locations specifically.

There are already 35 vacant storefronts in the mall, close to a third of the total number of stores the mall had back in 2013.

With so many B malls across America, there’s a good chance you’ve shopped somewhere a lot like Crystal Mall. These middle-tier malls were already having a tough time before the pandemic hit, and while they’re mostly managing to stay afloat for now, a record number of retail bankruptcies and companies voluntarily scaling back their store footprints puts them on the path for an uncertain future.

“A lot of the B malls are going to become obsolete,” said Vince Tibone, senior retail analyst at Green Street. “Before they were doing their best to remain competitive, but it’s going to be hard with all of the store closures to come.” Unless a B mall has a unique offering, consumers are likely to drive to an A mall or shop online, he said.

Rent and occupancy at B malls were already falling before the pandemic, but they were less likely to have several anchor vacancies or poor sales like the worst-performing malls in the U.S., those Cs or Ds. About 11% of B and B+ malls now have two anchor vacancies, while nearly a third of B- malls have two empty anchors or more.

Source: Green Street Advisors
Note: The number of malls per grade are rounded.

When malls have one anchor vacancy and other anchors start to follow, “that’s when things start to accelerate to the downside,” said Zachary Klein, a real estate and leisure analyst at Fitch Ratings. Since many leases include so-called co-tenancy clauses that let other retailers break leases or pay less if key tenants leave, an anchor vacancy can spell more bad news ahead for middle-tier malls.

One of Crystal’s remaining anchor tenants, J.C. Penney, filed for bankruptcy on May 15 and has announced plans to shutter about 150 stores, with more potentially on the way. J.C. Penney is not closing its Crystal location as of now, but the full list of store closures hasn’t yet been released.

J.C. Penney isn’t alone: More than 25 major retailers have filed for bankruptcy this year, according to data compiled by Bloomberg.

Source: Bloomberg analysis of court records

Although many bankrupt retailers continue operating while restructuring under Chapter 11, they’re planning to shut down droves of lower-performing stores. Justice recently shuttered its location in Crystal Mall after its parent company, Ascena Retail Group Inc., filed for bankruptcy on July 23. The mall also houses a Men’s Wearhouse, whose parent, Tailored Brands Inc., filed for bankruptcy on Aug. 2. It wants to close up to 500 stores, accounting for a third of its locations. Vitamin retailer GNC, which filed for bankruptcy on June 23, wants to close at least 800 to 1,200 stores. They both operate in Crystal Mall.

Other companies are also reducing their store count, whether they’re distressed or not. Macy’s plans to close about 125 stores over the next three years. Bed Bath and Beyond Inc. plans to close 200 stores, or about 20% of its locations, over the next two years. Signet Jewelers Ltd., the owner of the Kay and Zales chains—both in Crystal Mall—is closing hundreds of stores, and not just in the most distressed malls. CEO Gina Drosos said in an interview in June that she’s looking at leaving some lower-traffic B-malls and moving a portion of those stores elsewhere, away from the traditional mall setting.

To preserve tenants, Simon—the mall’s owner—has been looking into buying some of the bankrupt retailers in its properties. Brooks Brothers Group Inc. recently won approval of its $325 million sale to Simon and Authentic Brands Group LLC. Simon, Authentic and Brookfield Property Partners LP already bought bankrupt Forever 21. Simon is also in talks to buy J.C. Penney, which operates about a fifth of all anchor stores in U.S. malls. It may be a strategic move for mall owners, but acquiring their own retailers raises questions about the long-term viability of malls, according to Coresight Research. Just imagine if your landlord bankrolled you to make sure you got the rent in on time. Representatives for Simon didn’t respond to requests for comment.

All in all, as many as 25,000 stores could close in the U.S. this year, mostly in malls, according to Coresight. That would demolish the previous record of about 9,800 closures, set in 2019.

Between bankruptcies, distressed owners, store closures and existing vacancies, at least half of Crystal Mall’s square footage is now at risk. And hundreds of other B malls around the country are in the same boat.

“They’ll have a tough time filling this space,” Gabriella Santaniello, founder of retail consulting firm A Line Partners, said of B malls across America. “There’s going to be malls that are like a barren wasteland.”

With assistance from Olivia Rockeman, Kim Bhasin and Nic Querolo
Editors: Anne Riley Moffat, Yue Qiu and Rick Clough

Methodology: This story examines Crystal Mall, which Green Street Advisors defines as a “Class B” mall.

The number of bankrupt retailers in the past three years in Crystal Mall is based on a Bloomberg analysis of court filings. Data on bankrupt retailers does not include restaurant franchisee bankruptcies when the corporation itself hasn't filed for bankruptcy.

Distressed retailers were defined as a company whose interest rate on its debt trades at 1,000 basis points higher than Treasuries.

Store closures are based on a Bloomberg analysis of company filings, press releases, company websites and company statements. They include retailers that have announced plans to close stores since the start of 2020, though that doesn’t mean they’ve specified their Crystal Mall locations. Some retailers are shaded if its parent company announced store closures. For instance, Bed Bath and Beyond is the parent company of Christmas Tree Shops. However, this does not include Old Navy, whose parent company Gap Inc. announced planned closures, as Old Navy is the stronger brand.

Data on stores with planned U.S. closures includes those that have announced plans to close some stores and open others in alternative formats and less saturated markets, such as Starbucks Corp. and H&M.

The number of stores in Crystal Mall was calculated based on the mall’s online directory as of August 19, 2020. J.C. Penney, J.C. Penney Portraits and J.C. Penney Salon were consolidated into just J.C. Penney. The number of stores does not include Crystal Mall Community Workspace, Food Court, Management Office, Play Area, Public Safety Office and Simon Guest Services at The Mall, which are listed on the online directory.

The number of storefront vacancies is based on Crystal Mall’s online map.

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