The Decline of the American Mall

The past decade has seen the closure of hundreds of malls. Depending on the analyst you ask, between 10%-50% of American shopping malls will close over the next 20 years.
 
 The decline of the American mall has multiple causes, and contrary to widespread belief, it’s not just the growth of Amazon, and it’s not because Americans are spending less on clothes. We’re spending more than we ever have. The millions of square feet of vacant retail space, empty superstructures, and massive parking lots are the result of a flawed 1950s era tax law and changing consumer preferences.

— Overbuilding Due to a Flawed Tax Structure
 
 The roots of the American mall date back to the Eisenhower administration, but not in the way pundits suggest, when they correlate the invention of the mall with the growth of suburbs and interstate highways.

Mall development in the US is inherently tied to a little-known tweak in the 1953 tax code regarding accelerated depreciation. To encourage construction of large buildings (the move was intended to help manufacturers) during a recession, Congress allowed developers to claim multiple years of building depreciation in a single year. Instead of claiming 1/60 of a $60 million dollar structure expected to last 60 years as a $1 million loss, the tax code allowed developers to claim, say, 1/12 of the project’s depreciation in a single year, allowing a $5 million dollar loss to be claimed. It’s complicated, but a simple way to explain it is that developers could claim massive losses for years, and pay not taxes, while in actuality making millions from rent from stores.

Around the same time as that tax tweak, an Austrian immigrant named Viktor Grün who missed his native Europe and lamented the quietness of American suburbia designed the first indoor mall to create an indoor space that created a sense of community and life that mirrored European streets town squares.

To say the tax tweak was a success is an enormous understatement. That, coupled with cheap land on the edge of cities, rapidly expanding exurban neighborhoods, and an efficient (and brand new) interstate highway system, retail development took off for decades. The US has far more retail space per capita than any other nation. A 2005 report by Shopping Centers Today magazine revealed that America had 20.2 square feet of retail space per capita. The second closest nation was Sweden, with a mere 3.3 square feet per capita. The US massively overbuilt. For a time, that overbuilding created a powerful consumer culture and mall culture. The rate of growth was insane. In the 70s and 80s, a new mall opened in America every 3 days on average.

NOTE: Every source I found provided a different estimate of retail space or “sales space” per capita. But every source, even retail CEOs admit that the US has the most retail space.

But as that culture shifted, and as the tax code reverted to “straight line depreciation,” the overbuilding set in motion cascading failure, as malls starved each other of remaining shoppers as the number of mall shoppers fell. No society in human history had ever sustained even a fifth of the amount of retail space per capita as the US. Like a house of cards, it eventually collapsed. No new enclosed mall has been built since 2006.
 
 The death of an American mall follows a shockingly common trajectory. After the tax benefits dwindled away, and as the mall showed initial signs of trouble, the original owner of the still successful mall sells the mall. The buyer faces no tax benefits, an often out of date interior look that doesn’t attract shoppers, and stores starting to close as other, newer malls with sleeker designs outcompete them, and without funds for remodeling (after all, the depreciation write-off was collected and spent years ago), the mall faces an unstoppable cycle of closing stores and fewer customers before closing for good, either to be demolished, converted, or lie empty.
 
 — Changing Consumer Preferences
 
 Malls and big box stores are often lambasted for killing downtown shopping through their combination of lower prices, selection, and their sense of “cool.” Ironically, malls are being killed by online retail for the exact same reasons. Shoppers originally visited malls instead of downtowns to avoid traffic and experience the convenience of all goods in one place. The Internet outcompetes shopping malls the same way.

The shift in consumer tastes is much broader than just an increase in online shopping. The indoor malls themselves are no longer the fun experiences and crowd drivers they once were. Malls were originally built to be centers of community and social interaction in the relatively unwalkable and antisocial suburbs. They have lost their “coolness.” Changes in parenting styles have given teens less freedoms, reducing their opportunity to spend hours in a public place with their friends unsupervised. Fewer teens have drivers licenses or own cars, reducing their availability to visit the mall. The rise in female labor force participation has reduced the amount of time available for women to spend shopping.

Today, malls need to provide reasons for shoppers to come, in an age of digital distractions, fierce competition from other malls, and increasingly unreliable shoppers. To adapt to picky shoppers, malls are being forced to convert in unconventional ways. In some upscale neighborhoods, malls have converted to become more experience based, adding indoor skydiving, gyms, rock climbing walls, and even concert space. One mall profiled by CBS upgraded its movie theater to ban kids and offer chocolate martinis. Other malls have adapted to add grocery stores as anchor tenants. One mall transformed its interior designs and entertainment to appeal to Hispanic shoppers. Other malls demolish their interior, to become a hip, village-like outdoor shopping center (one wonders how long it will be before that design, too, no longer appeals to shoppers). Some have abandoned retail entirely, and have been converted into hospital campuses, community colleges, and even apartments. The transformation of malls from purely shopping centers into consumer experiences is fascinating to watch, and mirrors the greater economic transition in America, as healthcare rises, inequality rises, and demographics change.

The preference changes, particularly among youth, extend beyond the malls themselves. The stores that dominated malls are struggling. Teenage fashion retailers have lost their “cool.” Areopostle was delisted from the NYSE last year. American Apparel has lost over $300 million since 2010. Additionally, as an industrywide trend, retail is hiring fewer teens. The number of 16–19 year olds working retail dipped from 3 million in the 1980s to 1 million today. With fewer teens working in retail, there’s less of a reason for other teens to visit their friends at the mall, or “hang out” between shifts. Some malls are speeding up the decline of teen in malls, with over 100 banning teenagers not chaperoned by their parents at certain hours of the day. Traditional food court fast food chains such as Cinnabon and Sbarro’s are struggling to connect with younger customers, even as Americans spend more at restaurants than on groceries for the first time in history. Gamestop is becoming a nostalgia store, as new video games are now almost exclusively purchased online.

Not only is online retail skyrocketing, but when people visit physical stores, it’s not always to shop. Storeowners have lamented that people try on clothes and equipment, only to purchase it online on their phones five minutes later, sometimes while even in the store.

Additionally, the American middle class has shrank over the past several decades, and suburban malls, particularly in the Rust Belt, have felt the pinch. As America has deindustrialized and as inequality has risen, the working and lower middle classes have seen their wages drop, reducing the disposable income and purchasing power of those consumers, and changed their spending habits. While traditional middle income mall clothing retailers such as Macy’s and JC Penny have seen sales drop dramatically, discount clothing retailers such as Ross Dress for Less and TJ Maxx have thrived.
 
 — The Future

One of the bright spots for malls is overseas, as developing nations flex their newfound affluence. Along with building large skyscrapers and offering to host the Olympics, strongmen from Shenzhen to Manilla to Bangkok and Tehran are building massive malls to emulate America’s 20th century consumer culture. The top 3 largest malls are in China, four of the world’s 11th largest malls are in the Philippines, and two of the 11th largest are in Iran.
 
 Even abroad, mall overbuilding remains a concern. China built the South China Mall, the world’s largest, in 2005, only to have it become a national embarrassment, as it failed to fill with tenants, and stood empty for over a decade.
 
 Regardless of the moves other nations are taking, it’s clear that America’s era of malls is over, and we’re living in the tail end of it. We’re in the unique position to watch thousands of stores and shopping centers close, even in a period of economic prosperity.