Luxury Shopping Malls Thriving: Taubman Sees Rising Sales, While Kmart, Sears Cut Back

In a still-ailing economy, shopping centers are the latest incarnations of the widening wealth gap.

Indeed, go to a luxury mall owned by Taubman Centers Inc. -- like Short Hills in New Jersey or Beverly Center in California -- and you might easily forget a recession ever happened. At the Mall at Short Hills, shoppers relax in leather armchairs and browse handbags at the newly opened Hermes boutique. Bubbling fountains, tasteful shrubbery, and filtered light keep you hermetically sealed from the headaches of the outside world.

"High quality regional malls continue to be alive and well," proclaimed CEO Robert Taubman, son of founder A. Alfred Taubman, on a conference call with analysts Thursday.

Late last week, Detroit-based Taubman reported record sales of $641 per square foot in its 27 U.S. properties, up 26.1 percent over the past two years. In the last three months of 2011, its malls were 95.5 percent occupied, another record for Taubman, even as the company raised rents.

Luxury malls have remained largely insulated from economic conditions thanks to their affluent client base. According to the most recent data from the Congressional Budget Office, the incomes of the top 1 percent of Americans have grown 275 percent over the past 30 years. Meanwhile, the poorest fifth of Americans has seen their incomes rise by less than 20 percent.

In much of the country, middle-class malls are also falling out of sync with contemporary shopping habits. Built to satisfy a limitless 1950s consumer appetite, malls ultimately turned cannibalistic, losing business to each other as new locations were constructed too close together. Today, many shoppers favor outlet malls or outdoor "lifestyle centers," not large regional malls.

The recession was a nail in the coffin for struggling malls, bringing a drop in foot traffic and a flight of retailers. Even now, in a supposed economic recovery, malls continue to lose tenants: in December, iconic retailer Sears announced plans to close 100 to 120 of its Sears and Kmart stores, many in malls where they had resided for decades.

Once-prosperous malls are now so desperate for business that they are considering unconventional tenants, like evangelical churches and art galleries. Devoid of shoppers, some malls have become the favorite haunts of elderly "mall-walkers," who savor empty hallways for the opportunity they provide to exercise in quiet.

Today, the shopping scene is becoming increasingly bifurcated into value and luxury stores, according to Ben Yang, analyst at Keefe, Bruyette & Woods. "You have a situation where, for a big portion of society, the economy is not in great shape," he said. "Those people trade down. Rather than shopping at Macy's, they go to a J.C. Penney, dollar store, or outlet."

Indeed, like luxury retail, dollar stores and deep discounters have also been thriving of late, seeing sales numbers that are the envy of the industry. Taubman, which owns three "value" properties, is also seeing strong sales at these locations, according to executives on Thursday's conference call.

"It's the middle-income consumer that is being squeezed," Yang said.

Despite its own success, Taubman, which is currently expanding in Asia, is not optimistic about the future of the American mall.

"Our view is there's only going to be 15 to 20 shopping centers built in the United States over the next 10 years," Taubman said. "And we think that maybe half of those, we’d want to build."

For the moment at least, malls remain relevant to the most desirable of clientele. On the second Saturday in December, Stephanie Lyle drove all the way down from the Bronx to check out the Dolce & Gabbana boutique at the Mall at Short Hills, where she purchased a sweater.

"It's better than Manhattan," Lyle said. "They have all the same stores as Soho but under one roof. We love coming here."