No. 319: The Ballad of Victor Gruen

Remember this year: 1954. A Jewish immigrant from occupied-Austria was nearly 60 years ahead of his time. Victor Gruen made his name as the inventor of “the Gruen effect“, a method of storefront design that influenced casual bystanders to enter stores. His success as a designer caught the eye of Midwestern commercial developers. He later became the father of the American shopping mall. But his vision wasn’t the mall that we grew up with, it was supposed to be more.

In 2019, most of the thriving shopping centers now look like Ohio’s Easton Town Center, a real estate partnership between Les Wexner’s Limited Brands and the Georgetown Company. It’s less a shopping mall and more a self-contained town with living, dining, grocery, hotels, and an ease of mobility. Opening to fanfare in 1999, Easton is still a successful and growing development nestled in an existing suburb in Northeast Columbus. But even it is on shaky ground. This information was sourced from Mitch Nolen Retail:

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Here is a better visualization of your mall. 21% of these companies are headquartered in a Columbus, Ohio suburb.

Just a few miles from Easton Town Center, 21% of the above retailers are headquartered in and around the suburb of New Albany. The “town that Wexner built” is idyllic. It’s a derivative of what Gruen envisioned in the 1940’s. The city, itself, is stable, walkable, and growing. Local officials have attracted the likes of Facebook, Google, and Amazon as somewhat of a hedge against the area’s retail employment base. From Bloomberg’s recent feature:

The Silicon Valley giants will join some of Wexner’s current and former brands: Abercrombie & Fitch and Justice are both headquartered there, and Bath & Body Works has an enormous office in the park.

Attracting Silicon Valley to New Albany was a bet that is symbolic of a greater trend. Those Silicon Valley giants are as much a part of the commerce ecosystem as the drywall, steel beams, and concrete of the malls that span our country’s vast suburbs. But it isn’t the only culprit of today’s retail woes. In short, there isn’t enough demand (shoppers) to meet excess supply (stores). Retail real estate is permanently contracting. A recent headline from CNBC stated that “apparel retail earnings haven’t been this bad since the Great Recession. [1]” A capstone of all real estate developments, earnings are trading at recession levels despite a categorically booming economy.

Markets should be able to tolerate 10% hits

The GDP of the United States grew at 3.1% in Q1 of 2019. BEA analysts note that America’s economy is valued at $20 trillion, up from $15 trillion during the Great Recession of 2008. In effect, the economy of the United States is in good shape. But retail doesn’t necessarily reflect this optimism. The last enclosed mall was built in 2006 [2]. Retailers shuttered 102 million square feet of retail space in 2017, then a record-breaking year for retail closings. In 2018, brands shuttered another 155 million square feet.

In short, there isn’t enough demand (shoppers) to meet excess supply (stores).

There were 5,854 store closures in 2018. Now in 2019, we have already surpassed the previous year’s total: 8000+ retailers have already closed their doors. By April of 2019, alone, there were 5,846. Analysts at UBS suggest that the trend is only gaining velocity. The firm expects store closures to reach a pace of 10,000 per year, hitting 75,000 closures by 2026.

Consider this parallel. In 1995, the New York government began auctioning new taxi medallions, marketing them to potential drivers as long-term investments. Though the first medallion sold for $10, decades before, many of the medallions sold for $500,000 to $1,000,000. Just as the arrival of eCommerce blunted the economic viability of the mall, Uber and Lyft’s initial 10% hit on medallion prices sent the marketability of the asset into a 60-80% free fall. Mall retail is experiencing the same effect. One that will likely accelerate with additional tariffs.

New York City’s taxi medallion prices experienced forces that were extracurricular to free market forces. The government miscalculated as it waved the invisible hand. One could say the same about retail. Like New York’s taxi market and the effects of Uber and Lyft, eCommerce isn’t the only variable that contributed to physical retail’s diminished value. Government policy did.

Where it went wrong

The mall began in the American midwest. Victor Gruen designed the first enclosed shopping center in Edina, Minnesota. At 1.2 million square feet, the Southdale center was designed to challenge automobile-dependency. It was to be a sustainable, common space for the suburb of 15,000. In recent years – with increased competition for e-tailers and more modern malls, the development suffered through store closures, vacancy rates, and a fluctuating real estate market in the surrounding areas. Anchored by Macy’s, it remains viable for now. But it’s a relic of an incomplete vision. The mall was supposed to be more than what shopping center, Gruen’s vision was grander. From Business Insider:

The mall’s architect, Victor Gruen, designed the building to mimic Vienna’s outdoor squares, with plants hanging from the balconies and plenty of space for people to mingle. In the atrium, there was a fish pond, large faux trees, and a 21-foot cage filled with birds.

The founder of Gruen Associates, Gruen is the architect of the shopping mall. And if you can imagine, he disdained the legacy of his life’s work. His inspired and futuristic idealism for the town center-styled retail center (inspired by Vienna’s Ringstrasse) was overshadowed by socio-economic turmoil that he couldn’t have envisioned.

1944 – 1956

During World War II, President Roosevelt heralded the importance of consumerism as a form of patriotism. He demanded that regular Americans do their part by projecting the “American way of life.” This meant buying cars, televisions, washing machines, and new clothing – propelling our economy forward during a time of national distress. Post-war, this became a centerpiece of American life. Further, the U.S. government called on women, specifically, to adopt the belief that consumption was both a civil duty and a private form of enjoyment. With this culture-defining shift as the backdrop, Gruen made plans to build his urbanesque spaces throughout America’s growing suburbs. As troops returned home, town center-styled shopping malls were supposed to serve the women and men who served America.

Fort Worth Star Telegram – March 11, 1956

Victor Gruen wanted our suburbs to resemble urban spaces. He almost had his way. The plans from this archival newspaper article should look modern by today’s standards; many of today’s top tier malls maintain a similar inside-outside aesthetic with livability and walkability. But to understand why we’re over-malled, you must understand 1944-1956. The American shopping mall was born at the intersection of postwar capitalism, Cold War fear-mongering, and race relations.

1944: The Service Readjustment Act (SRA) succeeded the G.I. bill. With over 16 million middle-class GIs returning from WWII, the law was designed to stimulate a postwar economy by offering a state credit guarantee to veterans to purchase homes without a down payment. Over 5,000,000 veterans bought homes through this program.

1951: The introduction of the Federal Civil Defense Administration (FCDA). Between 1950 and 1951, aerial bombardment drills fed into fear and suburbanization in cities like Dallas, Philadelphia, Chicago, Detroit, Los Angeles and New York. Fearing that a foreign attack would destroy American cities, middle-class and affluent citizens began migrating to the suburbs.

Detroit was, in many ways, the context for what was to come. Deemed an “economic paradise” at the time, manufacturing was concentrated in this area. And as such, it was highlighted as a potential target for nuclear attack. In response, the city pursued aggressive decentralization, incentivizing prosperous citizens of Detroit to begin settling into suburban “safe” districts. The roads and streets to these suburban projects were carved out of working class, minority districts.

1953: According to Tom Lewis’ “Divided Highways. Building the Interstate Highways, Transforming American Life,” a certain boom occured in 1953 that enabled what happened next. Nearly 145,000 Americans installed new telephones, over 600,000 purchased a new television. But most importantly, 500,000 American families bought a new car.

1954: The U.S. Supreme Court abolished racial segregation in schools after Brown vs. Board of Education was decided. This meant that urban areas around the country were characterized as unlivable by some. Nowhere was this felt greater than in the midwest, where affluent families and government-funded veterans moved to the suburbs to allow their children to avoid certain schools. These neighborhoods were often deed restricted to secure borders. In some cases, incorporation allowed suburbs to form city governments that lorded over the rules and regulations of the area – written and unwritten. This massive exodus to the American suburbs corresponded with a construction boom in the outskirts of many metropolitan areas.

Shortly after this Supreme Court decision, Eisenhower enacted the “Accelerated Depreciation” (AD) program. This allowed the owners of commercial real estate developments to deduct building costs from their tax burdens. This new form of tax deduction enabled builders to extract wealth from their developments 10x faster than the year before. Thomas Hanchett’s “U.S. Tax Policy and the Shopping-Center Boom of the 1950’s and 1960’s” notes that there was one regional mall in 1953. No less than 25 were approved, immediately after this decision in 1954. America went from one mall to 25 in one year.

1956: Eisenhower’s administration moved forward with the Federal Highway Act, accelerating the construction of major roads and highways. Like a lifeblood to the middle-class suburbs, highways connected residents to city centers. Living in urban areas would no longer be necessary for the affluent. In an excerpt from the Quarterly Journal of Economics (Vol. 122, No. 2): Between 1950 and 1990, the aggregate population at the center of American cities declined nearly 17% while population grew by 72% in the suburban areas.

The Result

From Centers for the Urban Environment : Survival of the Cities by Victor Gruen

Victor Gruen never quite accomplished his vision for Minnesota’s Southdale or Detroit’s first mall: Northland. With malls as a new wealth vehicle for well-heeled developers, shopping centers no longer needed to be well-thought out: no green spaces, or hotels, or schools, or condominiums to help each shopping center thrive. Multi-use developments died – for a time – with 1954’s legislation. This was a turbulent time in America that Gruen couldn’t have possibly accounted for. His idea of imparting the wisdom’s of Vienna’s Ringstrasse gave way to massive buildings of aimless use, often competing with another massive building – just 5-7 miles away. This, during the century’s automotive boom, a phenomenon that he foresaw as a detriment to society.

Between 1955 and 1975, shopping mall development exploded. Though, development was no longer tied to demand. Many were built as extractable retail assets only to be flipped for massive profits. This meant that development was no longer tied to population growth. From the Annals of Commerce by Malcolm Gladwell:

Cortland, New York, for instance, barely grew at all between 1950 and 1970. Yet in those two decades Cortland gained six new shopping plazas, including the four-hundred-thousand-square-foot enclosed Cortlandville Mall. In the same twenty-year span, the Scranton area actually shrank by seventy-three thousand people while gaining thirty-one shopping centers, including three enclosed malls.

Today, multiple malls and shopping centers exist for every small suburb in America, designed and constructed with no expectation to achieve sustainable demand. Meanwhile, America is accelerating into urbanization with our growing GDP as the wind at its back. Direct-to-consumer brands are developing, eCommerce has grown to nearly 18% of all retail sales, and urban town centers are popping up – each taking cues from Gruen’s original vision. In a recent conversation with CNBC’s Lauren Thomas, Retail Metrics founder Ken Perkins said:

These are all mall-based retailers experiencing traffic issues.

According to Thomas, apparel mall retail profits are at recession levels. As of June, Macerich, Simon Properties, Kimco, Washington Prime Group, and Taubman properties are trading at five-year lows. This is inline with the numerous data points mentioned above. There aren’t enough viable challenger brands (DTC) to fill the 67,000+ store closures projected by 2026. So, it’s difficult to determine whether or not an American retail empire built on post-war consumerism, suburbanization, and accelerated depreciation will return to its former glory. But when we wonder how the “retail apocalypse” happened, look to 1954.

We moved tens of millions of Americans to empty parcels of land with cars and more stores, per capita, than any place on earth. And we told ourselves that the bubble would never pop.

Read the No. 319 curation here.

Research and Report by Web Smith | About 2PM

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