The unchallenged mecca of the Israeli consumer for more than two decades, Israel’s shopping malls are wilting in the face of internet competition.
But brick-and-mortar stores aren’t dead yet. Long regarded as a retail backwater, neighborhood shopping centers are now the place to shop.
Indeed, local centers have become so popular with consumers that big developers are trying to buy into the game and national chains are looking to rent space in them.
“Neighborhood shopping centers are immune from the internet,” explained Hay Galis, deputy CEO of the mall company Big Shopping Centers. “Unlike in enclosed malls and strip malls, in local shopping areas you won’t find all the big apparel chains, which have been the ones hurt the most by online shopping. Instead, you have stores that supply people’s daily needs.”
Galis said a shopper might go to a big mall once a week but the rest of the time he or she spends money at the supermarket, bakery, gift and book stores or goes to the bank branch, post office or medical clinic.
“In the newest neighborhoods, even the local nursery school is in the neighborhood center,” he said.
After years of developing strip malls, or power centers as they are known, Big is moving into neighborhood malls. In March it bought a neighborhood center under development with 3,300 square meters of floor space in the Tel Aviv suburb of Or Yehuda for 64 million shekels ($17.5 million).
A month ago it bought 50% of the rights to land in Or Akiva for another neighborhood shopping center to be built over the next two years. Last week it won an auction for land in Kiryat Gat on which will be build a neighborhood shopping center as well as offices and protected housing for seniors.
“We think it’s an area with a lot of potential. ... The public loves the new neighborhood centers. Even contractors building new neighborhoods — and there are plans for a lot of these — realize that consumers want them,” said Galis.
Moshe Rosenblum, CEO of Ofer Malls and deputy CEO of Melison, one of Israel’s two biggest mall operators, attributes a lot of the trend to the country’s increasingly crowded roads.
“Today it takes people a lot more time to get to work because there’s a lot more traffic on the road. It’s often hard to find parking on the street at home,” he said. “What that means is that people prefer not to use their cars. Instead they look for a local shopping mall or shopping area.”
Rosenblum concedes that the losers in this trend are many of the urban malls that his company owns and operates. One of them, the 17,000 square meter Lev Ashdod, is due to be closed at the end of next year and in its place will be built 500 to 600 housing units together with a neighborhood mall of 6,000 to 7,000 square meters.
Such malls, he said, won’t just have shops but offer services like health clinics, hairdressers and a local ranch of the motor vehicle agency. But, he said, big regional malls will survive, such as Jerusalem’s Malha Mall.
Big and Ofer aren’t alone. Tamir Ben Shahar, CEO of the consulting firm Czamanski & Ben Shahar, said he gets call every day from property developers looking to get into the action. They are willing to buy into projects at all stage of development and in any and all kinds of ownerships structures.
“The investment required isn’t very big and interest rates are low. Big, for instance, bought a neighborhood center in Or Yehuda for about 60 million shekels. You bring 20 million in cash and the rest you borrow.”
A survey conducted for TheMarker by Czamanski & Ben Shahar found there are about 150 neighborhood malls with a combined 550,000 square meters of floor space. Four years ago there are just 125 of them with 430,000 square meters. Another 39 centers are in development adding another 200,000 square meters of floor space. There are not only more neighborhood malls but they are getting bigger, with the new ones averaging 5,000 square meters.
Israel’s malls have been hit by new shopping patterns. For clothing and footwear, shoppers are buying online, but for things like food and entertainment they still do it the old-fashioned way. That spells trouble for Israel’s big malls, where 50% to 60% of the commercial space usually goes to apparel stores. Supermarkets have 10% and service providers 15%.
By comparison, apparel typically counts for 25% of neighborhood mall space. The bigger malls usually count a supermarket, too, so that food stores of various kinds now account for a third of the floor space. Services account for 17% of the floor space in neighborhood malls and restaurants for 13%.
Another big difference is that big malls are controlled by a small number of companies, led by Melisron and Azrieli Group, while ownership of neighborhood malls is much more disperse. It’s also a wide open field in terms of supply: While there is 0.19 square meter of mall space per person in Israel and 0.14 of floor space in power centers; for neighborhood malls the ratio is 0.06 to one.
The surge in housing starts that Finance Minister Moshe Kahlon is trying to orchestrate means there are lots of new locations.
“The government wants today to build residential neighborhoods and is building at least 50,000 housing units a year. In every sub-neighborhood there’s a place to build a neighborhood center,” said Ben-Shahar.
For tenants, however, that doesn’t mean rents are lower, certainly not in the great tel Aviv area. Ben-Shahar said the average about 250 shekels a square meter per month, about the same as in a big mall. In the periphery, the range from 75 to 125 shekels, less than half of what nearby malls charge.
On the other hand, management fees in neighborhood malls are much lower — ranging from 20 to 35 shekels a month per square meter, versus 60 to 100 at the big malls. Also, because the public spaces in neighborhood malls are smaller, the maintenance fees and the city taxes that tenants pay are also lower.
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