Being a mall owner and operator in Israel is a good business, even these days when consumers are keeping their wallets inside their pockets more than ever. Merchants may be having a hard time, but the malls themselves remain hugely profitable – except, that is, in Be’er Sheva.
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In the capital of Israel’s south, the corridors are empty, parking spaces are easy to find and so are tables at the food courts. Thus, even the Azrieli Group, Israel’s biggest mall operator, saw profit plunge 50% year on year in the last quarter of 2014. Business was good elsewhere, but at the company’s Hanegev Mall it has to write off 150 million shekels ($38 million) from its value.
No wonder; Be’er Sheva is in second place in Israel in the amount of commercial space relative to the number of households, according to Meyrav Einstein-Siano, a vice president at Czamanski Ben-Shahar, a market research firm. The only city with more shopping center space than Be’er Sheva is Rishon Letzion, with about 6.5 square meters per household, compared to 5.3 in the Negev city.
“Purchasing power in Be’er Sheva and surroundings is only average. It’s dependent on middle class communities alongside well-to-do ones like Omer and Meitar on the one side and [poor] Bedouin communities on the other,” she says.
Be’er Sheva’s mall glut started two years ago, when the largest shopping mall in Israel, the four-story, 50,000-square-meter, 1 billion-shekel Grand Canyon opened. At the Hanegev Mall turnover declined 33%, in Eliezer Fishman’s One Plaza Shopping Center about 25%,and in Big Shopping Center about 11% in the second half of 2014, compared with two years earlier.
Other projects in the city suffered even more. Visitors to the Hashdera Hashvi’it complex, which is owned by Housing & Construction Ltd. and Sela Capital, will encounter large numbers of empty stores. Some of them have signs touting the imminent opening of a new shop, but right now there would be few shoppers to greet them. Management is trying to rebrand it as a home design center.
“People have lost everything here because of the surplus of commercial space in the city,” Shuki Eliyahu, who owns a chain of shoe stores, says angrily. “A friend of my son’s opened a restaurant in the Grand Canyon and went bankrupt, lost millions and his family too. I refused to open a store there. Everyone is banking on Ir Habahadim [the Israel Defense Forces’ new training complex in the Negev], but it’s not as though the recruits will be getting money too.”
More to come
Yet amid the retail carnage, two huge entertainment-shopping complexes are being developed. And there’s more to come: A survey conducted for TheMarker by Czamanski Ben-Shahar indicates that construction for the Be’er Sheva area over the coming five years will produce store space at triple the growth of the area’s purchasing power. The greater Be’er Sheva area has a population of about 500,000, with forecast growth of only 8,000 households in the next five years, only half in the city of Be’er Sheva itself, says Einstein-Siano.
The Big Group, which has seen a more moderate 11% decline in turnover since Grand Canyon opened, says rivals who suffered more simply didn’t prepare. “We prepared for it for several years, which is what distinguishes centers that suffered a serious blow from those whose situation is reasonable, like us,” says vice president Hai Galis. “We brought in American Eagle, a food court and many discount stores. That’s why we’re the only ones with full occupancy.”
Most Be’er Sheva malls have relatively low occupancy rates, averaging 92%. At the power center Mall 7, which is owned by Rami Levy and Naftali Shimshon, only 72% of retail space has tenants, in the Grand Canyon it’s 89% and in Hashdera Hashvi’it 82%. Rents are relatively low, ranging from 70-130 shekels a square meter in strip malls to 150-200 shekels in Grand Canyon. At Tel Aviv’s Ramat Aviv Mall rents are between 475 and 500 shekels a square meter and at the Azrieli Mall 310-330.
“The Grand Canyon is too big, it’s not going so well there for us,” says Pini Partuk, whose Zebra apparel chain has an outlet at the site. “They should have built 20,000-30,000 square meters, 50,000 is too much. Management is aware of that and is offering good terms to those whose leases will be running out within a year, so they won’t leave.”
A senior executive in one of the leading fashion chains, who asked not to be identified, said his two stores in Hanegev Mall and Grand Canyon are eating into each other’s business. “The sales from the two stores are about the same as those from the store in Hanegev Mall before Grand Canyon opened, but our costs have doubled. Rent is about 20% of turnover, which is a lot. No store or chain would let themselves get into such a situation like that now. Today contracts range from 8% to 12% of the proceeds at most.”
Grand Canyon’s boss, Eli Lahav, insists that turnover is growing every month and that the mall’s size gives it an edge over the competition. “All the top brands in Israel are under one roof. There’s nobody else like us,” he says.
As opposed to Lahav, at Azrieli they admit they have a problem. The group is used to operating the leading shopping mall in whatever city it is in, where the tenants fight for space despite the high rent. But in Be’er Sheva, Azrieli’s mall is old and outdated.
“Our proceeds have declined by over 20% since the opening of the Grand Canyon, but in recent months, thanks to our good work, the decline has been checked,” says CEO Arnon Toren. “We’re going to invest tens of millions of shekels in renovating the mall. With our strengths we know how to fight. Maybe we’ll get back to our old numbers.”
Cinema City is building an entertainment-shopping center scheduled to open next Passover, but Leon Edry, one of the company’s owners and founders, says he is not worried. “We’ll have 20 movie theaters, a theater auditorium, 1,000 parking places and twice as much commercial space as in Cinema City in Rishon. What we’re building is a cultural and entertainment center, not a shopping mall. There will be restaurants, cafes, pubs, a pirates’ village for children. It will be open all night. We definitely wouldn’t have built a shopping mall. Two thirds of the leasing contracts are already signed,” he says.
Bedouin purchasing power
When visiting the Be’er Sheva commercial centers you can’t ignore the massive presence of Bedouin, who account for 12%-15% of sales. They spend 480-600 million shekels a year in the shopping centers in Be’er Sheva alone.
“Because so many shopping areas are opening outside Be’er Sheva, the Bedouin will probably do some of their shopping there, and Be’er Sheva will lose a lot of their purchasing power,” says Tamir Ben Shahar of Czamanski Ben Shahar. “The municipality has to make sure that the Bedouin continue to do their shopping in Be’er Sheva and contribute to its economy, by developing areas that will serve this target audience, for example upgrading the municipal market and ensuring that the new commercial projects are suited to various target audiences.”
According to Hai Galis, a shopping center that doesn’t know how to take advantage of the Bedouin’s purchasing power loses in a big way. “We advertise in newspapers that cater to the Bedouin sector, and a lot in [the Bedouin town of] Rahat, too. The Bedouin contribute 10%-15% of the sales turnover of Big Be’er Sheva,” he says. Another senior executive in one of the shopping malls, who asked not to be identified, added that the Bedouin’s purchasing power shouldn’t be underestimated, even if they are generally poor. “Usually they have large families, and they buy a lot of food and fashion items,” he says. “They do most of their shopping before the holidays.”