For years, the prime malls with the best locations escaped much of the havoc being wrought in the retail world by internet competition.

But now, even they are beginning to feel the pain, setting off new alarm bells on Wall Street. Some of the landlords of the most highly trafficked malls are warning of slowing income growth as they try to come up with new ways to cope with changing consumer behavior and billions of dollars of sales shifting online.


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For example,

Simon Property Group,

which owns King of Prussia mall in Pennsylvania and Phipps Plaza in Atlanta, Ga., lowered its 2019 guidance on net income to a range of $6.76 to $6.81 per share from its earlier estimate of $7.04 to $7.14. Simon executives said during the company’s third-quarter earnings call that a high number of retailer bankruptcies this year was partly to blame.

Taubman Centers Inc.,

which owns The Mall at Short Hills in New Jersey and Beverly Center in Los Angeles, also lowered its 2019 guidance for same property net operating income growth to zero to 1%, down from the previous 2% estimate.

William Taubman,

chief operating officer of the company, said the bad news was partly the result of the market overreacting to the Forever 21 Inc. bankruptcy.

“Forever 21’s bankruptcy has disproportionately impacted ‘A-malls’ and Taubman Centers specifically,” he said.

Shoppers at the King of Prussia Mall.


Sarah Silbiger/Getty Images

For years, many retail analysts considered roughly 260 top-tier malls to be mostly protected from store closings and bankruptcies that plagued their lower-tier peers in less affluent areas. These centers typically boast an attractive assortment of stores and restaurants, making them more appealing and relevant to customers.

But the recent bankruptcies of big-name retailers are beginning to fan further across the mall spectrum. Moreover, signs are growing that even when malls appear full, revenue growth is slowing because landlords have to cut rents to keep them there.

For example, Forever 21 has started closing 87 stores, such as its Riley Rose beauty store at Roosevelt Field in Garden City, New York. The teen retailer had earlier planned to close up to 178, but scaled that back after securing rent reductions from landlords, who in turn had to lower their earnings projections.

The average occupancy of the top malls continues to be in the respectably high 90% range. But some analysts are concerned about the higher costs landlords are facing to replace departing tenants.

Analysts also are starting to express skepticism about a major metric landlords tout: sales per square foot. Landlords typically calculate sales productivity against occupied space instead of total space. But that means stores can close without affecting the mall’s average.

Sometimes, a few highly-productive tenants can skew sales per square foot. For example, a Tesla store could raise a mall’s annual sales-per-square-foot number by hundreds of dollars.

“All it tells me is that you added a Tesla into your mall. It tells me nothing about how the mall is doing,” said

Vince Tibone,

an analyst at Green Street Advisors.

Investors in 2019 have punished the top mall owners, whose stocks typically outperform landlords of weaker shopping centers. This year, shares of Taubman and

Macerich Co.

have fallen by roughly a third, while Simon’s are down about 14%. The FTSE Nareit All Equity REITs Index gained 23% this year.

The stocks have fallen so far that some investors believe now is the time to buy. Dividend yields at Taubman and Macerich currently exceed a tempting 9% and 11% respectively.

Bill Smead,

chief executive of Smead Capital Management, said his firm recently started investing in Macerich partly because executives there have been buying their own firm’s shares. Stock purchases by executives are typically seen by investors as signaling confidence that more gains lie ahead.

But others voice caution. “They may not be as attractive as they look, especially since the dividends for some REITs are not fully covered and require cash flow growth,” Morgan Stanley Research analysts said in a note.

Simon, Taubman and other big landlords point out that they are investing heavily to come up with entertainment options and new retail strategies that combine online shopping with bricks and mortar retail. They are also spending hundreds of millions of dollars to redevelop a selection of malls, giving older ones a face-lift and adding residential, office or hotels nearby that could add value to the real estate.

“There’s a lot of redevelopment activity that is going to define the mall space,” said

Ross Prindle,

managing director at valuation advisory firm Duff & Phelps. “That doesn’t happen overnight.”

Write to Esther Fung at esther.fung@wsj.com

Corrections & Amplifications
The average occupancy of the top malls continues to be in the respectably high 90% range. An earlier version of this article incorrectly said “vacancy” instead of “occupancy.” (Dec. 24, 2019)

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