magine a Noah’s Ark for retail concepts, survival depends crucially on demonstrating that you really are a distinct and superior species, that consumers should come here to shop and not there. In the case of shopping malls, there is a good argument to be made that those retailers outside the concept’s home in the US have evolved into a distinct and superior species, whose productivity is growing steadily while that of US malls has not set itself apart and is stagnating.  The reason has little to do with design and everything to do with their fundamental business model, which has almost always incorporated the greatest foot traffic drivers of them all: hypermarkets and supermarkets. As incomes grow, consumers are gravitating to these one-stop-shop malls. Meanwhile, US malls by and large continue to shun them, with consequences for foot traffic and productivity growth that are painfully obvious. Non-US malls are clearly a different species, and they should easily be able to make a case to be on the Ark. Tenant productivity mired Despite productivity that is mired in the one spot, the mood at US-based Simon Property Group, arguably the world’s largest shopping mall operator, with more than 230 retail properties, of which all but 39 are in the US, is resolutely positive. Results for the second quarter, released by the company last week, were generally good, with net income of US$493.5 million, up 1.4 per cent from US$486.3 million a year ago. Funds from operations, a non-GAAP measure that adds back in depreciation of a REIT’s real estate and other variables to get a more accurate picture of actual performance, were US$1.088 billion, up 1.0 per cent.  Total revenue, of which the vast majority is leasing income, was US$1.3 billion, a healthy 4.8 per cent increase over a year ago. On the operations side, annualised base minimum rent per square metre was up 3.0 per cent, to US$190. Minimum (or ‘base’) rents account for about 80 per cent of Simon’s rental income. So what’s the problem?  Retailer sales per square metre were US$7976 for the trailing 12 months. That represented a further deterioration from US$8019 per square metre for the year ending March 31, which itself was flat with the December 2023 quarter. And this in an inflationary environment. Although these are averages, with some retailers doing better than others, it is still not something about which property owners like Simon are apt to sing from the rooftops. And as rents rise and sales stagnate, occupancy cost ratios (occupancy costs divided by sales) for retailers go up. These operating metrics are important because they are indicative of a creakiness in the underlying strength of the US mall concept. On August 15, Simon opens its 194th retail property in the US: a premium outlet centre in Tulsa, Oklahoma, with a gross leasable area (GLA) of 31,400sqm. The centre is 100 per cent leased at opening, an enviable situation, given that so many shopping centres around the world have ‘soft’ openings when they are well under fully occupied. Indeed, occupancy across Simon’s whole domestic portfolio keeps going north, sitting at 95.6 per cent at mid-year. That metric is still holding up, meaning that occupancy costs haven’t yet reached a level that causes demand to tail off.  Macerich, owner of 43 major retail centres comprising both enclosed malls and open-air town centres in the US, is, like Simon, reporting a healthy occupancy rate of 93.3 per cent as of June 30, but tenant sales per square metre are basically becalmed at US$9000, down 2.1 per cent from a year ago. Average base rent per square metre, at US$709, is higher than Simon’s and has been rising on a year-on-year basis. Stagnating sales and rising rents mean that occupancy costs are putting the squeeze on retailers at Macerich’s centres, too.  Chattanooga, Tennessee-based CBL, which operates 94 enclosed malls, factory outlet centres and lifestyle centres, is in the midst of its own struggle to lift the performance of its tenants and raise occupancy. Its occupancy as of mid-year was 88.7 per cent after declining by 110 basis points from a year ago. This was substantially due to the closure of stores by rue21 and Express. Tenant sales per square metre are also going in the wrong direction, declining by 2.1 per cent in the trailing 12 months, compared with the same period a year ago. Revenues for the quarter were essentially flat, year-on-year, and the first six months of the year, with the variable rent component declining as a percentage of rental income.  The good news is that with revenues not going anywhere, operating expenses declined materially and underpinned an increase in operating income. CEO Stephen Lebovitz was bullish, citing strong leasing volumes and positive leasing spreads as reasons for optimism: “Positive spreads on both new and renewal leasing showcased our focus on replacing underperforming tenants and locking in better-performing tenants at improving rents.” He also anticipates that a number of the departing rue21 tenancies will return under the retailer’s new ownership. US mall operators continue to shun supermarkets and hypermarkets All but one of Simon’s top 10 anchor tenants is a department store chain. Macy’s alone has 97 stores in Simon malls, JCPenney has 53 stores and Dillards has 35. Simon also owns or has an interest in 22 retail centres in Asia, most of which are factory outlet centres that don’t need grocery anchors because these centres are purely discretionary shopping trips.  Asian mall operators though, along with their brethren in the Middle East, Europe and Australia, invariably build the tenant mix of their retail malls around anchors that mix necessities with discretionary merchandising, which is to say they are anchored by hypermarkets or supermarkets. As a result, in the Apac region the mall business is thriving with productivity rates that are on average above those of the US when adjusted for income, and growing. There are a lot of reasons that US mall operators will give you for not having hypermarkets or supermarkets. They rarely make sense. If they want to make the Ark, they might have some explaining to do.