Years ago the newspaper was our primary source of news. However, today we have many more avenues from which to obtain information and, thus, the newspaper has lost its relevancy. Similarly, in my opinion, the sales-per-square-foot unit of measure traditionally used to calculate the success of a mall and/or shopping center is like the newspaper–still around but for the most part not significant in today’s retail real estate environment. I believe that while the industry continues to measure, judge and value malls and shopping centers by this metric, there is a better way to measure performance: by gross volume.
The gross volume being generated by a center is much more telling than sales-per-square-foot numbers, as customarily we have excluded anchors and tenants over 10,000 sf, such as Apple and non-traditional uses, when calculating sales PSF. How can we evaluate anything successfully using the sales PSF measurement if we exclude these key performance factors?
I know of a small lifestyle center that traded at a cap rate so small it looked like a rounding error. The sales-per-square-foot calculations were nearly double the industry average and the eye-popping numbers made the center seem like an investor’s dream. Unfortunately for the investor who acquired this small lifestyle center, a new center is now being built in the trade area with an anticipated gross volume in the neighborhood of $300 million. This high grossing center will soon become the new area darling while the lifestyle center will swoon into mediocrity, and I suspect that the investor who acquired the small lifestyle center wishes they hadn’t been seduced by sales PSF reporting.
Many industry folks want to exclude tenants such as Apple from mall performance evaluations because they skew a center’s sales-per-square-foot numbers. Well, they sure do, but wouldn’t you rather have them in your center than not? Yes, Apple and tenants like them skew sales-per-square-foot calculations, but why are we excluding $30 million in volume like it doesn’t matter or contribute to a center’s success? In addition, we also strip out tenants over 10,000 sf. Wouldn’t a successful Forever 21, Restoration Hardware or a flagship Victoria’s Secret be a positive contribution to a evaluating a center’s performance? Of course, but we overlook these success stories and are blinded by sales-per-square-foot figures.
In short, relying on PSF sales may be masking problems at your center. A rosy PSF number may look good today, but if the true performance is hidden, we run the risk of being lulled into complacency. Redevelopment or repositioning decisions may be delayed or, worse yet, not even considered because the current sales-per-square-foot totals appear decent. But perhaps you should look a little closer.
In today’s world, we are incorporating a number of non-traditional or non-retail uses into our centers, including medical, entertainment, residential and hotel uses. All of these uses drive traffic and contribute to a center’s success. Yet if we relied on sales-per-square-foot numbers only, we would overlook these vital contributors to a center’s strong performance.
Gross volume tells a better, more complete story. What is more telling – the total gross volume generated from a property or a sanitized sales-per-square-foot figure which excludes Apple, tenants over 10,000 sf, department stores, anchors, junior anchors and non-traditional uses? Historically, if a mall was doing $300 million or more in gross volume it was in the top 5% and $200 million or more placed the center in the top 10%. These benchmarks are a bit old, but still provide a great frame of reference.
Except for the select A-Malls, every mall in America should be redeveloped. Gross volume is a better indicator of when we should be repositioning or redeveloping a mall or shopping center. If we rely on sales-per-square-foot calculations, we may react too late or not at all, putting the mall in a perilous situation. Our focus should be on gross volume.
Gross volume sales tell the whole story, whereas, like the newspaper, sales-per-square-foot numbers provide some information, but have lost their relevancy.