The retail world is changing, and two of the biggest names in department stores—Dillard’s and Macy’s—are at the forefront. In this episode, Trademark CEO Terry Montesi sits down with the SVPs of Real Estate: Chris Johnson of Dillard’s and Chuck DiGiovanna of Macy’s, to discuss Retail’s Evolution: Malls, Department Stores, and the Road Ahead.
These industry giants share insights into how department stores and malls are adapting to today’s retail landscape, from innovative strategies to the importance of creativity and strong developers.
Chris and Chuck also explore the impact of technology, capital markets, and tariffs on the future of retail. With their extensive experience at some of the most recognizable names in retail, this episode is a must-listen for anyone interested in the future of malls, department stores, and the retail industry as a whole.
To stay informed and hear from two leaders shaping the future of retail, subscribe to Leaning In and sign up here to be the first to know when a new episode drops!
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Transcript
Terry Montesi: Welcome to our latest episode of Leaning In. Today I’m joined by two really good friends and important leaders in retail real estate, Chuck DiGiovanna, VP of Real Estate for Macy’s, and Chris Johnson, Senior VP and Principal Financial Officer at Dillard’s who also heads real estate for them. Chuck and Chris have had front row seats to the evolution of department stores, malls, and the broader retail landscape. As the industry continues to shift, whether it’s changing expectations of the consumer, the future of anchor spaces, or the relationship between online and brick and mortar, they bring unique and powerful perspectives on what’s ahead. It’s going to be a great discussion, so let’s lean in.
Well, good morning, friends. Thank you for doing this for me. We’re going to have fun today and talk about something that’s near and dear to all three of our hearts, the mall and department store business. Thank you all for joining.
Chuck DiGiovanna: Thank you.
Terry Montesi: So, let’s get started. I know our listeners would like to hear a little about your background. So, Chuck, tell us how long you’ve been in Macy’s and what was your path to getting to the point where you’re running real estate for Macy’s?
Chuck DiGiovanna: I actually started in the real estate business about 1992, working at Burger King of all places, just traveling the country doing new Burger King stores, which is actually a pretty good experience. It wasn’t anything I wanted to spend my career doing, but I saw a lot of real estate and made a lot of deals. I came to federated Macy’s in 2001, beginning of 2001. I worked there for about four years, then decided I wanted to be on the development side.
I went to work at Westfield on the development team there and eventually wound up running a regional development team and then an entire region for them. So I had full operating responsibility for their six Northeast centers as well as World Trade Center. Then I came back to Macy’s in 2010, and I’ve been running the Macy’s real estate since about 2016.
Terry Montesi: Great. Thanks. How about you, Chris?
Chris Johnson: So I’ve been at Dillard’s for 19 years since 2006, and then I got involved in real estate. I’m an accountant by trade, and then I ended up in real estate in 2012, so six years later I got diverted. I’ve been in real estate since 2012, and then in 2015, our CFO retired and took on additional responsibilities here at Dillard’s.
Terry Montesi: Yeah, you’re a busy guy. Well, you both are. Hey, Chuck, how many Macy’s are there operating today? And Macy’s, Bloomy’s, Market by Macy’s, give us a portfolio update.
Chuck DiGiovanna: So, the accounting of the store, operating stores is a little bit different. We closed 66 stores this spring. They’re all in the process of GOB right now. That will take us, but we’re really in the process of closing about 150 stores, and that’ll take us down to 325 or so full-line Macy’s. We have a bunch of furniture stores out there. We have maybe 40 or 50 of those, although we’re closing a few of those as well. We have 20 or so Bloomingdale’s outlets and four Bloomies stores.
Terry Montesi: Got it. And Chris, give us an update on the Dillard’s fleet.
Chris Johnson: So, we have, well, our last press release, I think we have like 273 full line stores and roughly 25 to 30 clearance stores, and those are our only two formats we have other than our internet store. But that’s kind of how we operate. We don’t have another segment other than we do own a construction company, a general contracting company.
Terry Montesi: And Chuck, Macy’s has been in the news a lot the last couple years as you’ve seen. Give us an update on Macy’s and how the business has been evolving and where you see it going the next few years.
Chuck DiGiovanna: Just in terms of operating sales and profitability?
Terry Montesi: Yeah, just the business. Where do you see Macy’s business going the next five years?
Chuck DiGiovanna: Macy’s business is really tied to the fate of the mall industry. And I think we’re all struggling with a market that’s a little bit tough right now. I think the economy is tough. The last month or two have actually been very tough. There’s some concerning economic signals right now that have come up particularly over the past week or so that are very concerning.
But we live in mall world and we’re married to mall world. And I think we are doing our best to merchandise the stores accordingly and to attract the customer and to be relevant to the customer. But there is a decided shift out there towards discount. And there is a decided shift away from any of the centers that are not really powerhouse centers out there. So, both of those trends sort of work against mall-based anchors. So I think it’s a tough environment to navigate, Terry, to be really honest with you.
Terry Montesi: And Chris, y’all have been one of the big winners in the department store business the last five years or so. What do you think a couple of big reasons for your success the last five years is?
Chris Johnson: Oh, well, I think dealing with the pandemic really kind of helped Dillard’s a little bit and had us focus and zero in on certain areas. Obviously, in the pandemic, liquidity became a big issue in cash flow and a lot of decisions were made on how much inventory levels we have, what’s the right mix, and all of that. And we really focused in on that, and also reducing the hours, I think, helped a little bit too. So, those two striking differences, I think, if you look at our financial performance, look at inventory levels and stuff.
Terry Montesi: So, one of the obvious questions that you guys have thought about, talked about a lot just the last 10 or 15 years, tons of articles and talk about the death of the mall, the death of the department store. Where did that originate and what’s your take on that? Malls and department stores have survived, obviously, lots of evolution, but give us your take on that, Chuck.
Chuck DiGiovanna: Well, yeah, a lot of speculation and not just post-COVID. That speculation started a good bit ago. I don’t think anybody really argues with the fact that malls got overbuilt, I mean, pretty significantly, dramatically overbuilt. A lot of malls just honestly have gone past their useful life. So, there’s going to be a trimming down to whatever a sort of proper surviving number of malls are out there.
I think it’s two things. It got overbuilt, and I think just the concept got a little bit old too. I think there was a time when it was cool to go to the mall and cool to open stores in the mall. And it was something people talked a lot about. I think they’ve been around a long time. I think they’re not looking as good as they used to. And it’s not the cool new shiny thing in any way. So there will be fewer out there. But having said that, Terry, coming out of COVID, there’s a core of malls out there that are very, very successful and have actually gotten stronger. So there’s a core of this business that’s going to be surviving, going to last a long time, and I think going to be a good platform for us to do business. It’s just the transition to get from where we came from to here that’s challenging.
Terry Montesi: What do you have to add, Chris?
Chris Johnson: Well, I agree with Chuck. I think the amount of square footage we had of retail space in the country was just far too much. And I think the excitement, the discussion, I think, probably began when internet shopping became a big thing and the excitement and everybody just kind of overwhelmed with, well, this is the easiest thing to do. You don’t have to go to malls. You’re not going to want to go to brick and mortar anymore. And I think the stronger retailers have figured out a way to still provide great customer service, great products, and a great experience to the point where we are surviving and not only surviving but doing well. And I think you have to find that mix. And I think that’s what’s going to help malls going forward.
I think some of the mall ownership has, well, probably not some, most of the mall ownership has somewhat deteriorated over the last few years. And I think we got a little overfinanced in the mall industry, in the retail space industry. And just the model didn’t work as well. You couldn’t adjust to the ’08 crisis, the pandemic hurt, and so you’re seeing a lot of malls that are struggling. But I think the retailers are figuring out a way to exist with that.
Terry Montesi: Yeah, you just teed up a next question for me. So you guys, you both commented there’s a lot of malls that are kind of either past a useful life or they become irrelevant, and I see a lot of them, even in decent trade areas or whatever, they were over leveraged, you mentioned over financed, they were over leveraged, and so nobody has any motivation to put any money in them.
So, what do you all see as some really good examples of mall owners investing wisely to transform and add life into existing mall properties over the last, say, 10 years? Chuck?
Chuck DiGiovanna: Yeah, I’ll be honest with you, I’m not seeing a lot of that. Post COVID, it’s interesting, coming out of the Great Recession, there was probably five or six years of really generally pretty good mall owners investing a lot of money in centers, doing expansions, adding restaurants, adding theaters, adding gyms, that kind of thing, but restaurants in particular. And we saw a lot of investment in those better centers, and it really did work pretty nicely.
That then sort of tailed off pre-COVID when you started to see a big rash of tenant bankruptcies. Remember, ’18 and ’19, there were a tremendous number of tenant bankruptcies. And then you have COVID, and coming out of COVID, honestly, there are not a lot of centers I’m seeing out there where there are significant reinvestments. There’s a remodel here and there. But for the most part, it’s hard to find the capital, the capital is more expensive, and you just don’t have sponsorship that these centers that have the wherewithal to really pull it off. So, Simon’s doing a little bit, Brookfield’s doing next to nothing, Macerich and Westfield or URW are really just sort of treading water while they can pare down to the centers that are good. I’m not seeing, honestly, a lot of reinvestment in these centers, unfortunately.
Terry Montesi: Well, you can say that La Palmera was a really good one back in…
Chris Johnson: La Palmera was a good one. We were both, Chuck and I were both in that one. I think it’s rare because I think when they develop malls, they seem to be like they were, it’s almost like a cookie cutter, just you’ve got your anchors, you got your inline tenants, and you just went to town. Well, it’s harder to find anchors, there aren’t as many of us anymore, and there aren’t as many inline tenants. And so, you have to rethink what that mall needs to be.
And I don’t think the industry has done a great job of being able to replicate it across all markets. I think it’s different for each market. I think the smaller markets are different than obviously the Dallas and the Houston markets where you’re trying to survive in the third, fourth, or fifth best mall there, and you have to do things a little different, or the tenth in DFW. So, it takes a little more creativity that I don’t think mall owners or developers were attuned to that.
Terry Montesi: And so where do y’all see opportunities? Capital is tough, but say there is a little capital out there. Where do you see the opportunities in the mall investment, redevelopment business going forward? The small one mall markets, the second or third over-leveraged one in that bigger part, where do you all see the opportunities? Chuck?
Chuck DiGiovanna: There’s like these three tiers of assets out there. There’re the really high-quality ones that, if you want to pick on Dallas, North Park is like it’s going to be just fine. And what do you call it? Stonebridge is going to be just fine. Sorry, the one on the north side of town, not Stonebridge. Stonebriar is going to be just fine. And then there’s the ones at the sort of bottom of the ladder. Willow Bend is not going to make it. And some of these other centers are just not going to make it.
But there’s a lot that are kind of in the middle that with the right sponsorship and with the right investment and ownership and attention to it, it could turn around. Like Hulen and Town East, I think, we’re going to pick on Dallas, but Hulen and Town East, those are very mid-market centers. They’re not exciting. They’re 400 or 500 bucks a foot. But they have good locations, they have decent performing anchors, they seem to trade really well. And I don’t know that Brookfield is the right ownership for that longer term, but the right ownership who is going to hustle the leasing and continue to keep the common areas attractive and keep the offering vibrant, I think that those middle centers have a path. With the wrong ownership, they’ll go the wrong way. With the right ownership, I think there’s a way to get through it.
And it sounds to me, Terry, like you can buy those centers now differently than you could have in the past. Like before the Great Recession, you could buy those centers at a six cap or a six and a half and like tough to make that investment exciting. It seems like when those centers trade now, they’re at a 12 or a 14 in some cases. And maybe that’s enough of a pricing adjustment to attract the right capital and the right sponsorship to make that work.
Terry Montesi: Yeah. And like you mentioned, Hulen, in my hometown, here in Fort Worth, it is on great real estate. Around the country, malls control a lot of high-quality real estate. What do you say about opportunities going forward, Chris?
Chris Johnson: The big market areas, it’s harder, but I think it can be done. I think the malls that are there now can all probably exist. They just need to be rethought of, and maybe like take Willow Bend, there needs to be a redevelopment of some sort likely. It needs to be… And you’ve got to think, you have to start thinking about, well, what do the customers, what do people like to do – restaurants, going out to eat, they like entertainment, they like grocery. And the other thing is people want to be catered to, they want… efficiency is kind of a thing now I think, and I think that’s where your opportunity in the big market is.
On the smaller markets, I think those, I think that’s a huge opportunity in the industry, and I don’t understand why there can’t be more capital when you’ve got these cap rates, these things are selling at 15 plus cap rates. I would think that would be a huge opportunity for developers. I wish some of the bigger developers who sold a lot of these malls, because they weren’t in their tier group or whatever, didn’t fit their model, would jump back in and say, look, a lot of these big-time developers owned a lot of these, they developed these things. They need to get back in there, I think. I think there’s a huge opportunity to make money on these.
Chuck DiGiovanna: But Terry, I don’t think there’s a lot of people out there with that business model trying to, at scale, pulling it off successfully. I think as Brookfield and Simon and Macerich and whoever shed these centers, there isn’t really a group of, or even a group of individual owners who are capable of assembling and aggregating enough centers to build a mid-market mall company out of that. A lot of these centers are going to random one-off owners that are really not qualified to do this, even though they might have the right intent.
Terry Montesi: Yeah. Well, back to the department store business, historically they were such a big traffic driver for malls and large outdoor malls, if you will, that you’re both in a number of. What do you see as the role the department store going forward, and how will they likely need to evolve, and how will they evolve over the next 5 to 10 to 15 years to stay relevant? Chris?
Chris Johnson: Oh, I think probably you have to stay the same. Do the same job you’ve been doing. I think you’re going to have to be better at operating through technology, through ease of use. Customer service has to be top notch. You’ve got to kind of expand that a little bit. I think your product offering could maybe expand some as there aren’t as many retailers in the mall and the mall evolved to being something besides just pure, 80% plus retail centers. I think there’s probably some thought process that needs to occur there with department stores. But I think having a… I think that’s one of the benefits of department stores is that we have the space to cater to a bunch of different type of customers.
Terry Montesi: Yeah. And so, Chuck, Macy’s is so big. I know there, the last 10 years, it’s kind of gone through three waves of rethinking, at least. What might be different about the department store 10 years from now? What are some of the things that you see that might change about the department stores in a good way?
Chuck DiGiovanna: Well, a couple of things. We got to react to the fact that the customer is looking for discount, and that is off price. And I don’t know exactly how that plays out with us, but the customer’s walking away from department stores and malls, going to TJ and whoever. And that is a long-term definitive trend that’s not likely to change. And I think what’s interesting about that to me is, at the end of the day, if you’re in an astute Macy’s shopper, and I’m sure Dillard’s is the same way, and you play sales and you play the loyalty well enough and you play the markdown game, the pricing of the goods you walk out of the store with is actually really competitive.
It’s just a lot to navigate to get there, and you’ve got to be kind of committed to work that process a little bit. We have this two or multi-tiered pricing system. We’d like you to buy that sweater the first day we put it out there at full price. The fact is most of those sweaters get sold after the first or second mark and then with a 20% coupon and then some loyalty points. The customer, I think we need to do a better job of educating the customer that, at the end of the day, the price point is actually more competitive than you think. The other part of it, Terry, is I don’t think we really have the answer. I’d love to say that we did. I think we have a really…
Terry Montesi: Well, that is disappointing, Chuck. I was counting on you to nail it.
Chuck DiGiovanna: Well, I disappointed me too. But we have a tremendous competitive advantage. Chris hit on it. Like, we have a tremendous amount of square footage that we pay next to nothing for. And if we do that, we can take a shotgun approach to the offerings. And okay, so we put 20,000 square feet against something that didn’t work this season, who cares? It’s not like we’re a 20,000 foot retailer that had to bet their whole 20,000 feet on something. We can make a bunch, we’ll take a shotgun approach to our merchandise offering, try a bunch of things.
Terry Montesi: So, you have a platform that allows a lot of R&D at a reasonably low cost overall, I see.
Chuck DiGiovanna: If we do it right, yeah.
Terry Montesi: Chris, anything else to add?
Chris Johnson: I think what will be interesting going forward is what technology brings to the table to all of this, how… the more information we have about customers out there in our markets, what we need to cater to, what their buying patterns are, I think that can help you fine-tune the shotgun approach.
But to Chuck’s comment, I mean, we’re not risking the whole store, 5,000 to 20,000 square feet on, okay, we think this is going to work this year. We’ve got room to kind of, well, this will work for this group or this works for this group, and overall, I think we’re going to be quite successful going forward. I think department stores are set for a good rebound. I think there’s going to be a lot of opportunity with the malls. I think one of the things the pandemic has shown us is that we can exist in bad malls. It’s not great. Obviously, it would be better if we had a great mall with us and leasing and stuff. But we’re figuring out how to exist. And you’re the one-stop shop in town.
Terry Montesi: Well, in a lot of ways, a department store is a mall.
Chris Johnson: Yeah, you become the mall now. And now I just need you, to your other point, Terry, malls are typically always in great real estate positions. And there’s a lot of opportunity to redevelop it and do some other things with it. The zoning’s already there. I know it’s not easy. It’s easy for me to say not being a developer and having to spend the money and figure out where to spend it, how to do it, go lease and stuff. But it just seems like there’s an opportunity to do that. And I think department stores are set to really be the anchor again in these redevelopment projects.
Terry Montesi: Yeah, you mentioned, you kind of alluded to rethinking what’s around you. Thinking about co-tenants and tenants that you like to be around as people are redoing these malls and oftentimes putting the shop space on a diet, getting rid of some of the shop space and replacing it, what are some of the tenants or co-tenant types that you believe will be most beneficial to your business going forward? Chuck, why don’t you start?
Chuck DiGiovanna: Well, I think Chris hit on this earlier, diversifying the offering and taking advantage of different kinds of shopping trips and different kinds of day parks and weekly shopping patterns. So I think in the old days, we had barriers that prohibited fitness, prohibited grocers, those kinds of things.
And I’ll never forget, the first time we had a developer come to us who wanted to put a Whole Foods next to us, and we were furious, fought it, fought it, fought it. This is a terrible thing. We can’t let this happen. And they found a way to do it without our approval. They just put it in this existing square footage next to us. Well, the day it opened, our sales went up 15% and they just stayed up 15%. And so, we said, oh, maybe that’s a good idea. We had a Dick’s Sporting Goods at one point. This is like more than almost 20 years ago. Someone was putting a Dick’s Sporting Goods, sorry, a Galleons next to us. Fought it, fought it, fought it. This is terrible. It’s right outside the men’s store. It’s going to impact our parking. Sales in the men’s store went up 20% the day it opened and stayed up 20%.
So, I think we’ve learned to have fitness, grocery, restaurant, entertainment, those sorts of things I think are really critical to keep it as a… or convert these centers to not just sort of fashion outlets, but true town centers.
Terry Montesi: Yeah. I certainly, and we talk to you guys a lot about projects that we either manage or we’re looking at, and the cooperative nature, the last 15 years of y’all and folks in your business, other folks in your business, it flipped upside down. It’s about sort of invest in anything that will bring life to this place. It’s kind of the-
Chris Johnson: Absolutely.
Terry Montesi: Chris, what co-tenants do you see going forward? Who do you like to be around, et cetera?
Chris Johnson: It doesn’t matter to me anymore. We used to have this laundry list. We used to put, if we were to do a new deal, we had this list of we want you to have X percent of these A type retailers and B, C, all that kind of stuff. We’d send it to you. And then it’s like we want X percent of retail space, X percent of this. And then like a small percentage could be office. I mean, right now, I don’t… We look at these old approvals that come in and somebody wants to do, I don’t know, like Chuck said, fitness. It’s weird what some of these documents don’t allow you to have in a mall, and I just toss it all out. I don’t really worry too much about it. I mean, probably a funeral home’s not…
Terry Montesi: Yeah, not noxious uses is about the only thing you’re eliminating now.
Chris Johnson: I mean, because as long as somebody’s willing to invest in the mall and lease it and it brings activity, that’s what you have to think about. It’s back to thinking about what do people like to do with their time.
Chuck DiGiovanna: And those documents were drafted to stifle creativity and to thwart any kind of development. They were set up to stop you from doing anything other than what you were doing on that day. And navigating through those documents to get to what the center should be given what we’re talking about with all these uses, boy, oh boy, it is a challenge.
Terry Montesi: What the business, what the mall business or the business in general would look like had there sort of, whatever mall developers and department stores were fighting, had that not happened and everybody just said, as long as it’s a good use, a quality use, we’ll let you do it, who knows what those things would all look like… people would have gone different directions. Go ahead, Chris.
Chris Johnson: We’ve approved schools and churches in some cases.
Terry Montesi: Better than an empty box.
Chris Johnson: Yeah. Well, Sears created a lot of empty boxes. And there’s a lot of them still hanging around that need to be…
Terry Montesi: They were good at that. Hey, so one of y’all mentioned or several times mentioned the pandemic. So, it accelerated a lot of changes, flushed out a lot of weak retailers, but also changed a lot about how we think about retail space, going to the mall, the services we want. What did the pandemic, how did it impact your business? And are there any shifts that are here to stay and things that your business got better at because of the pandemic? Chuck?
Chuck DiGiovanna: I just think it accelerated some trends to be honest with you. Like we were trending towards fewer malls, we were trending towards trimming out some of these centers that just weren’t as competitive. I think it just accelerated that for the most part. How did it affect Macy’s individual business? I don’t know. Chris is a little closer to the merchant side of it than I am.
Chris Johnson: Yeah, I think overall department stores or retailers that survived are just more efficient. We better use all panels of selling to customers, buy online, pick up in store, buy online and ship from store, we use that a lot now. The internet obviously was always there. And the cool thing that happened after the pandemic, when people kind of got more comfortable getting out in the public, was if you had really good customer service, and most of us did, they enjoyed going back to the mall. It created a nice opportunity.
Like I’ve got four kids and my youngest daughter had her 12th birthday or something, I think, and we had a cosmetic thing when we took a bunch of her friends up to our store here in town. And you always hear that the younger generation isn’t big into malls and stuff. Those girls loved it. We had 15 girls in the store getting their makeup done, and it’s the service of all that. I mean, teaching you how to apply makeup, what this does and how this makes you look and all this and be subtle with it or whatever. The same thing with service for getting dressed and putting clothes and shoes and dresses and all of that. I think people, there’s some of that on Instagram and stuff, but the interaction with people, I think, people miss, and I think they enjoyed it when they went back into the stores.
Terry Montesi: Yeah, so I think like some of the things that have survived on the developer side is like people, like you said, people wanted to get out. And so, they put public spaces, outdoor seating. So, we’re building way more outdoor seating than we used to in cooperation with the restaurants.
And we’re thinking about, and you’ve seen it, Chuck, at the Galleria, creating more outdoor public spaces, which we’ve recently done there, but also creating the inside, using the inside to create an indoor public space. Because it gets hot in a lot of these markets or it gets cold in a lot of these markets. And if you can feel like, hey, where do I want to go spend some leisure time? Oh, it is pretty fun to walk through there because they’ve got beautiful plants and public art. And guess what? People that make that decision to go to these places because they just want to hang there, they almost always buy something. So, I think that’s something that survived.
So how about, I know, Chuck, you and I’ve talked a little about online and brick and mortar. So post-COVID, how are your companies and you individually thinking about online, brick and mortar, how they will interact going forward in your businesses and the importance of both? Chuck?
Chuck DiGiovanna: Yeah, so this is one area where I think Dillard’s and Macy’s have had different strategies, and you can debate which one is in the right in the short term and the long term. But Macy’s has invested tremendous dollars in its digital presence. So that’s the supply chain network, the technology that feeds the supply chain, both the equipment, material handling equipment in the facilities, as well as the technology that drives it, which is a big piece and an expensive piece, and then to invest heavily in the functionality of the app, the website, and the stores. So we’ve made tremendous investments in that.
We thought at one point we were going to hit $10 billion by this time on digital sales coming out of COVID. It slowed down a little bit, but it’s still a very significant piece of our business. And we think it’s a core way that we serve the customer in that we’re really, truly omni-channel, happy if you buy it online, happy if you buy it in the store, and you can return it how and where you want to return it. And although that creates a lot of challenges, there’s a lot of challenges operationally behind that, we think it’s going to be really helpful for us in cultivating customers longer term.
Chris Johnson: I wouldn’t add much to that. I think the omni-channel buzzword, it’s still, what you’re trying to do is provide convenience to the customer anyway they want to shop, they want to shop mobile, they want to shop, I mean, some people shop at work.
Terry Montesi: You think?
Chris Johnson: Yeah. And so, getting it to the customer at lunch.
Terry Montesi: I just looked back at Jenny and she’s shaking her head no.
Chris Johnson: I can tell you, Jenny looks like she’s honest, not that you’re not honest, but do you shop from work? I’ve been guilty of it a few times myself, a confessional. I think you just try and interact and touch with that customer any way you can. Obviously, you want to get them into the store. I think the benefit of being in the store is that it’s easier to look at the variety of shoes or shirts or whatever you see in the store at one time as opposed to scrolling through. You can see like six or eight, nine pairs of shoes online, and then you’ve got to go to the next page, the next page or whatever.
I think to me, it’s easier to shop at the store, and it’s easier, I need help putting outfits together. I wish [?] came back, [?] if you all remember that. But I think sometimes it’s like I can do well with a suit and a white shirt, which I wear most of the time. But it’s easy. Your customer service people in the store need to help with all of that and the makeup application and stuff. I mean, men’s cosmetics, there’s treatment, not really cosmetics as much, but treatment’s becoming a bigger thing. And most men that I talk to don’t really want to do it. They don’t know how to do it. They didn’t grow up with that kind of thing.
But I think making it convenient for the customer to shop however he or she wants to is key, and how they want to return it. Do they want to ship it back? Do they just want to drop it off at the store? What do you want? We’re here for you. We’ll do whatever.
Terry Montesi: So, Chuck, we’ve talked a little about it, what would y’all like to say to folks like us and other owners of mall properties that are good properties but haven’t been reinvested in the past decade? What message would you like to give to landlords out there? Chuck?
Chuck DiGiovanna: Come talk to us and hear which stores we think are really good for us, which have a future, and make bets around that. Like, if you’re looking at a center, Terry, I encourage you to give me a call, and I’ll tell you, hey, that’s not one I’d put a lot of dollars in, or that’s one I think has a lot of potential if it had the right sponsorship. So I think we can still be a good anchor in terms of driving traffic. I think we can be a good anchor in terms of just the lending the name, there’s the credibility to, really, the investment community, frankly, that they have us.
And I think I would love to see somebody set up a vehicle to take a lot of these mid-level centers, good performing, just not super exciting centers and find a way to lease and manage and invest in them in a way to keep them vibrant and viable going forward. There’s been a few different groups out there dabbling in it. I’m not sure that they’ve done it at scale any place, but we would welcome, I mean, Chris and I would welcome an entity that showed up that was bringing these sort of mid-level centers some attention, some cash, some leasing focus and resource, and be credible owners longer term, rather than have them fall from Brookfield to bad ownership. There’s just not a mid-level set of owners out there doing that at this point.
Terry Montesi: Yeah, the capital markets have just not provided much liquidity, which at some point, it’s got to get so good that folks will figure it out. Chris, what do you want to say to landlords?
Chris Johnson: Well, visit your malls. Visit markets, I think that’s key. But talk to us. Chuck’s right. I mean, give me a call. I’ve got ideas. I have people tell me all the time, well, let me know where you think there’s a market that needs some, has an opportunity to buy a mall or redevelop it or whatever. I got a bunch of them. I mean, I mention them all the time, and I don’t know why…
I’ll give you an example, Fayetteville, Arkansas, Northwest Arkansas is one of the fastest growing areas in the country. Brookfield has a partnership with the local family up there, the Hunt family, and they have a lifestyle center up in Rogers, Arkansas, which is about 20 minutes plus away. Well, Fayetteville is a town where the university is, 34,000 students and growing. It’s the second largest town, I think, now in the state. And it’s a great opportunity, I think, but Namdar owns it, and they have done nothing with it. That mall has gotten worse every year they’ve owned it. And I think those are the things that…
And I guarantee you, they’ve never been to that mall, and they’ve never asked me what are you seeing in the market, how’s the market doing, what do you think we could do to improve the mall? I’ve got lots of ideas. It’s just mind-blowing to me that you can’t make some of these things work. And I’m close obviously in the state of Arkansas, but there’s a lot of malls, there’s not a great mall in this state. And there needs to be. There are opportunities. It’s a growing state. I think there’s… Texas, Texas has grown, how much in population? Florida’s grown how much in population? Arizona’s grown how much in population? Well, how many malls can you point to in each of those states that have gotten significantly better along with the level of the population increase the last four or five years.
Terry Montesi: Yeah. And you mentioned, I think the over leveraging of the mall business, I don’t remember, when did that happen? What era was that?
Chris Johnson: I like it was in the 70s and 80s and 90s. You could finance 10 percent of malls, couldn’t you?
Terry Montesi: Yeah. The loans that are on them today, whenever those were put on them, there’s so many malls that are overleveraged, so nobody can yet justify in those situations putting any capital in. And like you said, they have to get to the point where they’re going to sell for a 15 or 16 cap or somebody can attract capital. So that’s one of the big issues is the big question, when will liquidity return to the mall business? And I know for your companies, that’s a big issue.
Chuck DiGiovanna: But there’s another issue to that financing too. Yes, they got over-leveled and a lot of that was coming out of the Great Recession. The CMBS market became a major financing vehicle, but as these malls need to evolve or these malls decline, that CMBS structure is just awful for how much friction it creates to find the next owner to get fresh capital into it to take the center to its next life. How many centers out there that we look at that are stuck in receivership for years, and you just get no answers out of them, no investment. That CMBS structure has been terrible for malls.
Terry Montesi: Super frustrating for y’all.
Chris Johnson: Let me ask you this, Terry, I’ll turn the tide. So, do you think part of the problem with getting liquidity or capital infused in these malls is just the narrative that malls are dying? Do you think that, when you’re going in looking for investors or loans and stuff, I mean, is that just the people thinking that?
Terry Montesi: That’s a part of it. Another thing we hear, Chris, is that the CapEx requirements are really scary. The operating expenses and the CapEx requirements for malls scare a lot of people away, and they look at, golly, I can buy a grocery anchored center that is just so predictable. So, it’s the unpredictable nature, and to y’all’s point, some malls pricing has now gone to the 11 to 16 cap range because of that. And most things swing, the pendulum swings, it feels like it’s swung far enough that capital ought to start being interested because like, Chris, you and I, we’ve looked at a mall over the last couple of months that the cash flow has been quite stable.
And so, what people ought to be looking at is stable cash flow, but what they then say, but what’s not stable, what’s unpredictable is the cost of the HVAC and the roof and replacing the floor and replacing the parking lot, blah, blah, blah. And so, I think that’s what I’ve heard, Chris, is one of the biggest issues out there.
You beat me to it, my next question was, is there anything any of y’all want to ask each other or you want to ask me?
Chuck DiGiovanna: I’ll ask you a question, Terry. We’re all looking for somebody to rise up and be an aggregator of these centers that Brookfield and Simon and whatever and Macerich and Westfield don’t want anymore. And Centennial sort of showed up and has aggregated some but seems to have slowed down a little bit. There’s Pacific, there’s Trademark, there’s Spinoso’s picked up some assets. What’s holding people back from stepping up and finding the right platform to get this done? Is it just the capital? Because the pricing has adjusted.
Terry Montesi: Yeah, I mean, it’s that CapEx, et cetera. But if you also think about where the big capital comes from, and they look at their alternatives, and can you imagine being one of the investment folks at a big multi-billion dollar private equity fund or core fund that says, hey, you know what, guys, I want to buy some malls. It’s just the headline risk has been so bad, and all the boxes closing. And that’s the other thing, the uncertainty and risk related to co-tenancy.
And of course, y’all can fix a lot of that. But what you can’t fix is you can’t fix if there’s a mall that has two anchors, and all the small shops say you’ve got to have both anchors or the rent goes down, and then Sears closes, and it’s the level of uncertainty of co-tenancy, of operating costs, of CapEx. They’re just so complicated and so capital intensive in investors’ minds that it just keeps driving that pricing up.
Now I will say that as of late, just like this last, say, year, 18 months, there are a few, a few, we’re talking to a couple right now, a few big capital providers that think taking a look at the mall space makes some sense, but it’s slow and early. The capital is just coming back to retail, period. Grocery anchored has been pretty active, but everything other than grocery anchored has been really capital constrained until really just recently. And so, the malls will be sort of the last because they’re the most complicated, perceived, Chuck, as the highest risk. They’ll be the last place that capital likes, which creates a great opportunity for a buyer today. Right, Chris?
Chris Johnson: Right. Oh, I agree. I think there’s a lot of opportunity out there. I think one of the challenges is what I said earlier, you can’t take a cookie cutter approach. It’s going to take some hard work. It’s just a challenge. And those people in most industries and most successful people are the ones that get after it and work hard at it and solve the problem will make it. I think that’s what some of these bigger guys have not been willing to do.
Terry Montesi: So, my last closing couple of questions are just around the future of the industry, the future of retail trends, retail trends. You guys have been around the business a long time. What are some things your companies or you individually are hearing about that you think are going to have a material impact on the retail and retail real estate business over the next decade? Chuck?
Chris Johnson: Understanding where technology takes us is kind of a… what AI does, what its impact is going to have for us. That’s interesting. I think right now, I think most retailers are struggling, trying to figure out what impact the tariffs are going to have on us right now. And we’re kind of having tunnel vision of trying to think outside of that, because it’s so much in our day to day lives right now. It’s hard to think out past year one, but year five and ten, I think things are going to get more efficient, better. We’ll be better communicators, hopefully, I would imagine. I’m not real good at futuristic predictions.
Terry Montesi: Well, y’all have done just fine.
Chris Johnson: I think it’s like football. I mean, you got to… still blocking and tackling is important, your basic things, some things just never change. And I think retail is doing… William Dillard, the founder of the company, used to say, from what I understand, doing 100 things 1% better. It’s just always striving to get better. And I think if we still do that, if we strive to always try and find things, there’s always something to find that you can improve on. And I think if we continue to do that, we’ll be fine. I think most people will. I wish all department stores, all retailers, and mostly I wish developers would do that, all developers.
Terry Montesi: Chuck, I’m sure you’ve had an aha while you were listening to your buddy over there.
Chuck DiGiovanna: I think what I’m really hoping for is, I think we’ve just been through a period of time where technology has been people’s focus and like fashion has not had a day in a while. When was the last time you sort of felt everybody’s got to have that black shirt, everybody’s got to have a skirt with that sort of cut to it? Just haven’t had that in the past number of years. And I think it’s been so much going on with technology. How much money have people spent on iPhones and iPads or whatever for the last 10 years? That’s money that could have gone to something else.
And I think fashion has just fallen a little bit by the side, particularly even more so with work from home. You just kind of wear whatever you wear. Fashion isn’t going to go away. Fashion’s been there for centuries. I’m hoping that fashion has another moment, and if it does, we’re really well positioned to be there for it.
Terry Montesi: Yeah. And as y’all were talking, I had a couple of things jump into my mind. One is that post-COVID, the casual thing, the at leisure at work, the technology, you mentioned technology, Chris, fashion technology. Almost every shirt or every pair of pants, no matter how formal they look, have stretch in them now. That’s technology. And then the whole post COVID work from home, but then, hey, I’ll go back, but I got to be more casual than I used to be thing. And the employees have kind of adopted that.
Chris Johnson: I’m sitting here wearing a tie.
Terry Montesi: Yeah. Well, you’re a little old school, pal, but that’s okay. It’s certainly working for your company. Well, I just want to say thank you all. I knew it would be fun having this visit, and I really am grateful to two of my good friends in the business for taking this time. And I think what we notice at the trustee meetings together, nobody talks about the mall business.
Chuck DiGiovanna: I know. That used to be a mall-based organization.
Terry Montesi: Yeah. When I first got involved, it’s only been eight or nine years ago, at least a third of the discussion in the room when we went around the room was on the mall business and the mall guys were there. And now we’ll go a whole two day meeting and nobody will mention the word mall. It’s crazy. I think that’s creating an opportunity, a Warren Buffett type contrarian opportunity. So let’s work on it together. Y’all have a great day. Thank you y’all both for your time.
Chuck DiGiovanna: Thanks. I really enjoyed it. I appreciate it.
Chris Johnson: I enjoyed it, too. Good to see you all.
Terry Montesi: Chuck and Chris, thank you both for sharing your insights today. It’s clear that while retail real estate continues to evolve, there’s still a lot of opportunity for reinvention, adaptability, and long-term success. And thanks to all of you for listening. If you’ve enjoyed this episode, be sure and subscribe and follow us for more conversations. We’ll see you next time on Leaning In.