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Okay, so you want to buy a shopping mall, go behind a big empty building, fill it with stores, and watch the rent checks roll in every month. Hundreds of shoppers walking past your stores every single day, and every one of those
Explore the complex economics behind owning shopping malls, including costs, income layers, risks, and the impact of changing retail trends.
Key Takeaways
- Owning a mall is a bet on the neighborhood and tenant mix, not just a real estate purchase.
- REITs dominate mall ownership, mitigating risk through diversified portfolios.
- Anchor tenant leases and co-tenancy clauses can significantly impact mall profitability.
- Multiple income streams support mall revenue, but anchors are subsidized by smaller tenants.
- The rise of e-commerce and decline of department stores have fundamentally challenged traditional mall economics.
Summary
- Owning a shopping mall is not simple; it involves huge upfront costs whether building from scratch or buying existing properties.
- There is a significant difference between class A malls with luxury anchors and high income, and lower-tier malls in weaker neighborhoods.
- Most malls today are owned by REITs, allowing investors to spread risk and avoid direct management challenges.
- New mall owners face inherited anchor leases, deferred maintenance costs, and co-tenancy clauses that can reduce income if anchors leave.
- Mall income comes from multiple layers: base rent, percentage rent tied to sales, and common area maintenance fees paid by tenants.
- Anchor stores pay much lower rent per square foot because they bring foot traffic that benefits smaller stores.
- Vacancies increase operational costs for remaining tenants, creating a downward spiral in struggling malls.
- The decline of department stores like Sears has accelerated mall closures and forced costly renovations to subdivide anchor spaces.
- Changing consumer behavior and online shopping have eroded the mall’s original convenience advantage.
- Surviving malls have shifted focus to experiences and reasons to visit physically, beyond just selling products.
Chapters
- 00:00Introduction to mall ownership challenges
- 01:06Class A malls vs lower-tier malls
- 02:17Mall ownership through REITs
- 03:28Inherited leases and deferred maintenance
- 04:35Layers of mall income: base rent
- 05:49Percentage rent and sales-based income
- 07:12Additional income sources and operational costs
- 09:14Impact of anchor store closures and mall decline
- 12:00Adapting malls to changing retail landscape
Full Transcript — Download SRT & Markdown
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stores pays you just for the privilege of standing there. Sounds simple. It is not simple. And the story of how malls actually make money, and how they actually die, is one of the strangest stories in all of real estate. Before
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you make a single dollar, you need to survive buying the thing, or building it. A large regional mall is not a small purchase. Building one from scratch on empty land with all the parking, the plumbing, the electrical systems, the
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climate control, and the permits can run into the hundreds of millions of dollars before a single store opens its doors.
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The land alone can cost tens of millions. Then you pour the concrete, put up the steel, run miles of wiring and ductwork, build out multiple levels of parking, and satisfy a small mountain of local zoning and safety regulations.
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By the time the ribbon gets cut, you can easily have spent more than the price of a small hospital. Buying an existing mall is usually cheaper up front, but that's where things get interesting, because not all malls are the same mall.
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There is a huge gap in this industry between what people in the business call class A malls and everything below them.
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A class A mall is the kind with a luxury department store, high sales per square foot, a waiting list of brands wanting to get in, and a location near wealthy suburbs. Those trade for enormous sums, sometimes north of a billion dollars for
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the best ones, because the income they produce is stable and predictable. Then there are the malls two or three tiers down. Older buildings, weaker anchor stores, lower income neighborhoods nearby. Some of these have sold for a tiny fraction of what it cost to build
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them. One mall in Akron, Ohio, called Rolling Acres, sold for $2.75 million in the early 2000s, and that was considered a lot less than what the previous owner had paid, which was over $33 million.
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A mall that once had over 140 stores eventually sold again for well under $2 million dollars and it kept losing tenants after that. So, here is the first thing nobody tells you when they picture owning a mall, you're not really
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buying a building, you're buying a bet on a neighborhood and the price tag tells you almost everything about which bet you're making. Most people who own malls today, by the way, don't own them the way you'd own a house. They own them
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through a structure called a real estate investment trust or REIT for short. A REIT is a company that owns income-producing property and is legally required to pay out almost all of its profit to shareholders every year in exchange for not having to pay corporate
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income tax on that money. This structure is a huge part of why large-scale mall ownership exists in its current form.
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Ordinary investors can buy shares in a mall owning REIT on the stock market for the price of a cup of coffee without ever having to personally deal with a leaking roof or a collapsed anchor tenant. The largest of these companies
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own dozens, sometimes over a hundred, shopping centers at once, spreading the risk of any single mall failing across a much bigger portfolio. That's a very different game than the one facing a private buyer who puts everything into one building in one town. Say you've
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settled on a mall and the purchase price seems reasonable. Before you collect a single rent check, there's a layer of costs that catches almost every new mall owner off guard. First, there are the anchor leases you inherit and you don't
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get to renegotiate most of them right away. Anchor stores, the big department stores that sit at the ends of the mall, often sign their leases decades ago, sometimes for shockingly low rent and those leases can run for many more years
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before you get a chance to raise the price. You inherit whatever deal the last owner made, good or bad. Second, there's deferred maintenance. Roofs leak, HVAC systems that cool and heat over a million square feet of space wear
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out, parking lots crack, escalators and elevators need constant service. If the previous owner was cutting corners to keep cash flow looking good on paper, you find out about it the first winter you own the place, usually in the form
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of a very large repair bill. Third, there are what's called co-tenancy clauses buried in almost every mall lease. These are contract terms that say, in effect, if a major anchor store closes, the smaller stores around it are allowed to pay reduced rent, or in some
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cases walk away from their lease entirely. You don't see this cost on the day you buy the mall. You see it the day your anchor tenant leaves, and suddenly a dozen other tenants are legally allowed to pay you less, or nothing at
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all. That's the trapdoor under the floor. The mall looks fully rented on the day you sign the papers. But, the moment one big piece falls out, the whole financial structure underneath it can shift without you doing anything at
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all. Here's where it gets interesting, because the way a mall makes money is more layered than most people realize.
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The first and simplest layer is base rent. Every store pays a fixed monthly amount for its space, usually priced per square foot per year. A small specialty store might pay somewhere around $40 to $60 per square foot per year in a strong
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mall. A department store anchor, by contrast, often pays a tiny fraction of that. In fact, according to real estate analysts who studied Sears store leases before the company's bankruptcy, Sears was often paying somewhere around $5 per square foot in rent, while the average
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rent at top quality malls was closer to $50 or $60 per square foot for other tenants. Read that again. The store with the biggest sign and the most floor space was paying roughly one-tenth what the little clothing shop next door was
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paying per square foot. Why would a mall owner accept that? Because the anchor isn't really paying for space. It's paying for its name. The anchor brings in customers. Those customers walk past dozens of smaller stores on their way in
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and out. The mall owner isn't renting square footage to the anchor. The mall owner is renting foot traffic from the anchor, and paying for it with a rent discount.
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Every other store in the building is, in a sense, subsidizing that discount, because they're the ones paying full price to be near it. The second layer of income is called percentage rent. This is money on top of the base rent tied
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directly to how much a store actually sells. A typical structure works like this. A store agrees to pay its base rent, but if its yearly sales cross a certain amount, called the breakpoint, the mall takes a small percentage of
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everything sold above that line. So, if a store's breakpoint is set at 1 and a half million dollars a year, and the store sells 2 million dollars that year, the mall might take somewhere around 6 or 7% of that extra $500,000.
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That's real money that scales automatically with how well the mall itself is performing without the mall owner lifting a finger. The third layer is called common area maintenance, or CAM for short. This is separate from rent. It's the tenants paying their
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share of the cost of running the building itself, cleaning the floors, lighting the hallways, maintaining the parking lot, running security, keeping the escalators moving. Each tenant pays a portion based on how much space they occupy compared to the whole mall. If a
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mall's shared costs for the year come to $250,000, and a tenant occupies 10% of the mall's total leasable space, that tenant owes $25,000 of that bill for the year. This is important because it means a big chunk of what it costs to physically run
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the building isn't paid by the mall owner directly, it's billed straight back to the tenants. Then there's a fourth category that most people never think about at all. Everything that isn't a store, par
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digital screens and directory boards, kiosks in the middle of the walkway, which often charge extremely high rent per square foot because they take up almost no space and sit exactly where foot traffic is heaviest. Pop-up events, holiday markets, seasonal photo booths.
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None of these show up in most people's mental picture of owning a mall, but for some properties they add up to a meaningful slice of total income.
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There's a counterintuitive detail hiding inside that kiosk math worth pointing out. A kiosk in the middle of a busy walkway might occupy less than 100 square feet of floor space. And yet, because it sits directly in the path of
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every single shopper passing through, it can be priced at a far higher rate per square foot than a full-size store along the wall. Size and rent, in other words, are not the same thing in this business.
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Position is worth more than space. A tiny cart selling sunglasses in the busiest intersection of the mall can, per square foot, be one of the most valuable pieces of real estate in the entire building. So far, the mall sounds
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like a machine that prints money from four different directions at once. Now, here's the other side of the ledger.
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Utilities on a building of this size are enormous. Keeping over a million square feet climate controlled year-round, lit, and running is one of the largest recurring expenses a mall owner faces.
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Add to that security staffing, ongoing cleaning contracts, landscaping, snow removal in colder regions, and constant small repairs. A broken sprinkler here, a cracked tile there, and the monthly operating bill for a large mall can run into the hundreds of thousands of
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dollars before a single dollar goes toward paying down the loan used to buy the place. Then there's property tax, which on a large commercial property in a major metro area can be one of the single largest line items of the year.
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And insurance, which has been climbing sharply across the entire commercial real estate industry in recent years, especially for older buildings. There's also a detail buried inside the CAM structure that catches new owners off guard. Those shared costs don't shrink
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just because some of the mall sits empty. The hallways still need to be cleaned whether every store beside them is occupied or not. The lights above a vacant storefront still need power.
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Security still has to patrol the entire building, not just the leased sections. So, when vacancy rises, the same fixed pool of shared expenses gets divided among fewer paying tenants, which means each remaining tenant's CAM bill goes up, even though nothing about the
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building's actual upkeep has changed. Rising vacancy doesn't just mean lost rent from the empty stores. It quietly raises the cost of staying in business for every store that's still open, which is exactly the kind of pressure that pushes marginal tenants to leave, too.
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And here's the trap almost nobody sees coming until they own the place. Even a mostly full mall can lose money if the mix is wrong. This is the counterintuitive part. It's not just about how many stores are open, it's
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about who's paying real rent and who isn't. A mall might look at 90% occupied and feel healthy from the outside, but if half of that occupied space is anchor stores paying next to nothing, and a growing share of the inline stores are
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on short-term leases at discounted rates just to keep the lights on, the actual cash flow can be far weaker than the occupancy number suggests. Occupancy is not the same thing as income. That distinction is where a lot of mall
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owners get into serious trouble. Before we get to how malls die, it's worth understanding something that mall developers figured out decades ago, because it explains almost everything about how these buildings are shaped.
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The man most credited with designing the modern American mall was a Michigan developer named Alfred Taubman. He didn't just build shopping centers, he studied in detail how people move through a building and then designed the building around that movement. He spaced
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anchor stores apart from each other by roughly the distance of about three city blocks, so that shoppers walking from one big store to the other would pass dozens of smaller shops along the way.
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He put escalators and elevators at the ends of hallways instead of the middle, so people would walk the full length of a corridor to reach them. He designed skylights with artificial lighting mixed in, so shoppers couldn't easily tell how
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much daylight had passed and lose track of time. None of this was decoration. Every choice was designed to maximize the amount of storefront a shopper's eyes would pass across before they reached what they actually came for.
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That's the entire commercial logic of a mall in one sentence. Force movement and you increase exposure, and exposure is what the smaller tenants are actually paying for when they sign a lease. Now here's the structural risk that runs
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through this entire business, and it's best explained through something that actually happened across the American mall industry. For most of the 20th century, the department stores like Sears were the backbone of the shopping mall. They were the reason malls got
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built in the first place. Developers would often not even begin construction until they had one or two major department stores signed up as anchors because banks wouldn't lend money for the project without that guarantee of foot traffic. But starting in the 2000s
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and accelerating sharply after 2010, those same department stores began closing at a rapid pace. Sears, once the largest retailer in the country with about 4,000 stores at its peak, filed for bankruptcy protection in October of 2018.
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At the time, one major mall owner had Sears stores in 59 of its properties.
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Another had them in 40. Across the industry, roughly 80% of Sears branded stores were located inside regional malls. Here is why this mattered so much more than closing any ordinary store.
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Remember the co-tenancy clauses? When an anchor closes, smaller tenants around it can legally reduce their rent or exit their leases. So one closure doesn't just remove one tenant's rent check. It can trigger a wave of rent reductions throughout the mall, sometimes affecting
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dozens of stores at once, all because of contract language written years earlier back when everyone assumed the anchor would stay forever.
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And filling that empty anchor space back up is not simple or fast. These buildings were built for one specific kind of tenant, enormous floor plates, sometimes over 100,000 square feet, with loading docks and layouts that don't easily convert into anything else. One
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mall owner spent $100 million over 3 years just to subdivide a single old department store building into four smaller stores. Multiply that cost and that timeline across dozens of empty anchor boxes at once, which is exactly what happened when Sears began closing
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hundreds of stores simultaneously, and you start to understand why analysts describe the bankruptcy as something that would cause pain for mall owners for years afterward, not months. This is the structural truth underneath the whole industry.
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A mall doesn't fail because business is bad everywhere. It fails because one piece falls out and the rest of the structure was quietly built to depend on that piece staying in place. To understand how this plays out in the
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real world, it helps to look at one real mall from opening day to demolition.
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Rolling Acres Mall opened in Akron, Ohio in August of 1975 with Sears as its first anchor and about 20 other stores around it. Within a few years, it had grown to over 140 stores with five different department store anchors, a
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movie theater, and a food court. By the mid-1990s, it was one of the busiest shopping destinations in the region and at the time a new Target store was added, the mall was reported to be about 98% occupied. Then, slowly, the anchors
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started leaving. A newer, renovated competing mall opened nearby in the late '90s and pulled shoppers away. Target relocated to a different town. Dillard's closed. One of the remaining department stores was rebranded twice within 2 years before finally shutting down due
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to poor sales. By 2006, the mall's occupancy had fallen dramatically and it was sold for $1.6 million, a building that had once been valued at well over $30 million.
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The interior of the mall officially closed in 2008, though two remaining anchor stores stayed open through separate outside entrances for a few more years. Sears finally closed in 2011. The last remaining tenant, a JCPenney outlet, closed at the very end
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of 2013 and from that point the building sat completely empty. What happened next is the part that makes this story worth telling on a finance channel rather than a ghost story channel. The empty building attracted scrappers who tore
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out copper wiring and anything else of value. In one incident, a man died after being electrocuted while trying to steal copper from a power box outside the mall.
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Vandals broke skylights, which let rain and snow pour directly into the building for years, rotting the floors and ceilings from the inside. The city of Akron eventually had to take ownership of the property itself because the owners had stopped paying property taxes
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altogether, owing more than a million dollars in unpaid tax by the time the city stepped in. The building was finally demolished in stages between 2016 and 2019. Amazon later built a distribution center on the same land.
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Keep this in mind if you ever think a full mall means a safe mall. Rolling Acres was 98% occupied at its peak. It took less than two decades to go from that number to a pile of rubble and a
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warehouse. The line between those two states was not one dramatic event. It was a sequence of smaller ones, each one making the next one more likely. The Sears bankruptcy and the slow collapse of malls like Rolling Acres didn't
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happen in a vacuum. They happened at the same time online shopping was taking over an increasing share of retail spending in the country.
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For most of the 20th century, a mall's core product wasn't really the stores inside it. It was convenience. If you wanted to compare five different brands of shoes in one afternoon, the mall was the only place in town that let you do
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that in one trip. That convenience was the entire reason people would drive across town and pay for parking. Online shopping broke that monopoly completely.
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A shopper can now compare hundreds of options from their couch, have it delivered in a day or two, and never deal with parking, walking, or a checkout line at all. The mall's original reason for existing, convenience, simply stopped being unique
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to malls. This is why the malls that struggled most were often the one stuck in the middle. Not upscale enough to sell an experience people couldn't get online, but not cheap enough to compete purely on price with discount retailers,
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either. The weakest malls, usually the ones already carrying financial strain or located in areas with declining populations, were hit first and hit hardest, exactly the pattern analysts described when Sears began closing stores. The strong malls getting stronger and the weak malls getting
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weaker. At the same time, the mall owners who kept their properties alive did it by changing what they were selling. Instead of leasing space to more clothing retailers, many mall owners started filling their old anchor boxes and empty storefronts with things
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a computer screen genuinely cannot replace. Restaurants that require a physical table, gyms and fitness studios, medical clinics and urgent care centers, which need a physical location by definition, co-working office space, entertainment venues like movie theaters, arcades, and indoor
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attractions. Some malls converted entire wings into apartments or hotels, turning what used to be pure retail space into a mixed-use property with several different income streams instead of just one. The underlying idea is simple, even if executing it is expensive and slow. A
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mall used to sell products. The malls that survived started selling reasons to physically leave the house. Reasons that online shopping cannot deliver to your door. So, does owning a shopping mall actually work as a business? The honest answer depends entirely on which mall,
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and the gap between the good outcome and the bad outcome is enormous. In the optimistic scenario, you own a well-located mall with strong anchor tenants that still draw heavy foot traffic, a healthy mix of restaurants and services alongside traditional
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retail and low vacancy. In that case, base rent, percentage rent from strong selling tenants, and CAM reimbursements together produce steady, predictable income every single month with property values that hold or even climb over time as long as the surrounding neighborhood
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keeps growing. This is the outcome that made the biggest mall-owning companies in the country into some of the largest real estate businesses on the stock market, and it's the outcome that made men like Alfred Taubman into billionaires. In the realistic bad year
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scenario, a single major anchor closes. Co-tenancy clauses trigger. A handful of smaller tenants renegotiate their rent downward, and a few more simply leave when their leases expire rather than renew. Utility costs, insurance, and property taxes keep rising regardless of
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how many stores are open because those bills are tied to the size of the building, not its occupancy. Meanwhile, the empty anchor box sits there for a year, 2 years, sometimes far longer, generating zero income while still needing to be secured, insured, and
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maintained. On top of that, the fixed CAM pool now gets spread across fewer paying tenants, so even the stores that stayed loyal are quietly paying more just to keep the lights on in hallways that see less foot traffic every month.
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The difference between these two years for the same building can be the difference between a healthy, growing asset and one heading toward the same ending as Rolling Acres. Neither scenario is exotic or theoretical. Both of them happen constantly across the
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same industry, sometimes to the same building only a decade apart. Rolling Acres itself lived through the optimistic version first, nearly full, five anchors, over 100 stores, a beloved local landmark, before sliding into the realistic version and never recovering.
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The building didn't change. The economics underneath it did. A mall looks, from the outside, like a building full of stores. From the inside, it's actually a single, tightly interconnected financial system, where every tenant's fortune is quietly tied to every other tenant's fortune, whether
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they realize it or not. The anchor doesn't just sell appliances or clothing. It sells the foot traffic that every smaller store around it depends on to survive. And when it leaves, it doesn't just leave a hole in the floor plan, it
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pulls the financial floor out from under everyone standing near it. The building isn't really the business. The people walking through it are.
Topics:shopping mall economicsmall ownershipreal estate investment trustREITanchor storesmall income streamsretail real estatemall declinedepartment store bankruptcycommercial real estate
