When planning a successful shopping centre, location is always a top priority. If a retail project sits in the middle of a busy commercial district, or a densely populated residential area, the starting point is a catchment with lots of potential customers. But in an era with oversupply looming in many cities in China, and landlords having a harder and harder time pre-leasing space, do smaller shopping malls have less execution risk?

During a recent field trip to Zhabei district, a densely populated and mature residential part of northern Shanghai, we found three cases of low occupancy, community-oriented shopping centres that from a location perspective can be considered “good” sites. The three projects have been operating for more than one year, but average occupancy is still less than 50%. After going through Shanghai’s retail supply list, we found a significant number of smaller projects (20,000 – 50,000 sqm) in residential areas that are struggling to find tenants throughout a long period of time to reach stabilisation.

What are the reasons behind these projects’ struggles? Inexperience on the part of the landlord can lead to a lack of understanding of the catchment area and poor planning of the project positioning, including:

• A mismatch between the types of tenants and income level of the neighbourhood;
• Ineffective or inexperienced leasing teams for finding non-anchor tenants, especially after a supermarket, cinema or KTV have been secured;
• Rental expectations that are too high.

If the average housing price near a community mall is low, residents in the neighbourhood tend to spend most of their time and money in the anchor supermarket rather than the other stores. If the catchment area has many high-end residential projects, but the mall doesn’t offer interesting lifestyle tenants, consumers may instead drive to a destination shopping mall further away for more options. Another execution risk is when anchor tenants “steal away” consumers rather than securing foot traffic for the whole property. Supermarkets or cinemas will often have their own direct access points and consumers can easily bypass the rest of the property if there isn’t a sound conversion strategy to lure them in. In conclusion, while these malls will probably stabilsze eventually, once the landlord gets the positioning right, ‘going small’ is not a panacea – there is still plenty of execution risk. Careful planning and a strong retail asset management team are critical to ensure a successful shopping centre.

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