The American mall is undergoing a transformation, but retail property professionals are still assessing what exactly it's turning into.

Industry analysts agree, after thousands of stores have closed, that the "if you build it, they will come" strategy woven throughout the retail industry's history has officially expired. Tenants and customers alike are abandoning the days of shopping in traditional, big-box anchored spaces.

Prominent retailers such as Gap, Bath & Body Works, Foot Locker and even Macy's are offloading their locations in aging, indoor properties across the country as the vestige of the 1990s and early 2000s has lost its grip on American culture. As the iconic multilevel escalators, food courts and sprawling surface parking lots have emptied, companies long considered indoor-mall stalwarts are shedding their old stores and replacing them with locations with fast access and some element that's worth the trip rather than ordering online.

"Retailers are trying to close out all of the locations that no longer work," Neil Saunders, an analyst at GlobalData Retail, told CoStar News. "Profits are under a great deal of pressure, so companies are looking carefully at the performance of their portfolio across all outlets and property types, and the weakest performers and those with the weakest prospects are ones in traditional malls."

In referencing traditional malls, retail executives and stakeholders are talking about the enclosed properties in lower-tier cities and suburbs that were anchored by now-defunct brands such as Sears, Lord & Taylor or Mervyn's. The shopping centers were backdrops in movies such as "Clueless" or "Fast Times at Ridgemont High," and customers were fine with wandering around to window shop and sip on an Orange Julius.

To be clear, the mall isn't dead. But the split between successful and soon-to-be-obsolete retail properties has widened in recent years because of a confluence of factors such as department store closings, a shift toward experiential retail, the pandemic, and tenants' demand for storefronts in accessible, well-located areas.

The longtime formula of sandwiching a collection of tenants between two or more big-box anchors has been thrown out the window. Customers are demanding more of a destination worthy of a trip that goes beyond simply placing an order online. Retailers are hunting for spots that are easily accessible in order to accommodate convenient in-store pickups and build more brand awareness.

"They're not performing as they once did, and retailers are pulling out since they don't want to be in those closed-off locations," Saunders said. "When you look at those types of malls, the ones companies are pulling out of are the malls that are just horrible locations. They were built in the 70s and 80s, haven't been refreshed or refurbished, and they're closed-off places without much natural light. Nobody wants to go to them now since there are other, much better places to shop. That downward spiral has meant retailers are taking a stricter view about where they want to place their bets."

The challenges facing traditional malls began to mount years before the pandemic. They've been tracked by the industry's biggest trade groups, the National Retail Federation and ICSC, which is having its annual conference this week in Las Vegas.

Department stores were closing locations at an unprecedented pace, and as foot traffic dwindled, smaller retailers followed closely behind. There are roughly 700 malls in America today, according to data from analyst Coresight Research, down from about 2,500 in the mid 1980s and a figure expected to shrink further. Some forecasts have estimated there will be as few as 250 malls before the end of this decade.

As the economy places more pressure on retailers to scrutinize expenses and optimize their real estate portfolios, they have increasingly closed or relocated underperforming mall locations, a trend that has accelerated as companies emerge from the depths of the pandemic.

"Retailers that were traditionally mall based are pulling out of those traditional malls and moving to suburban, open-air and possibly even grocery-anchored properties," Brandon Isner, CBRE's head of retail research for the Americas, told CoStar News. "For occupiers now, whatever site builds your brand in the best way and in the best direction is the best site, and we've seen so many retailers shift or shrink their spatial requirements to be flexible if it's space in the right place. There's a lot more nuance to it now, so that 'if you build it, they will come' mentality is something I just don't believe in anymore."

Increased competition for space in desirable locations has even started to crimp retail leasing across the country, according to CoStar analysis, pushing volume levels to the lowest point since the height of the pandemic in mid-2020. The amount of available space in high-demand properties such as midsize shopping centers, top-tier malls or lifestyle centers has fallen to record lows. On the other end of the spectrum, however, interest in lower-tier, traditional malls continues to wane, and landlords are struggling to boost their occupancy figures.

As many as 50,000 retail stores across the United States are estimated to close before 2027, according to analysis from UBS, many of which are located in substandard malls that have long fallen out of favor.

The pandemic exacerbated the vacancy challenges traditional malls faced when customers concerned about their health and safety avoided the enclosed spaces and instead turned to open-air properties.

"We are definitely seeing brands move out of enclosed malls," Barrie Scardina, the executive managing director and head of retail services for Cushman & Wakefield, told CoStar News. "There's been a shift to shopping outside and feeling more like you're in a community. That trend started with the feeling of safety from COVID."

That transition has only gained momentum as some of the industry's largest brands have committed to retooling their retail footprints to prioritize off-mall locations.

"As retail continues to evolve, our flexible model supports a continued shift from what was predominantly a mall-based business toward a more diversified model that includes digital and off-price," CEO Erik Nordstrom has told analysts about the company's shifting real estate strategy.

Nordstrom isn't the only high-profile retailer eschewing their once-dominant mall presence in favor of alternative locations.

As companies weed out underperforming locations and look for spots that will boost their market share, mall stalwarts such as Gap, Bath & Body Works, Foot Locker, Macy's, Williams-Sonoma and Kohl's have joined other brands including Lululemon and Warby Parker in choosing outposts in suburban lifestyle centers and higher-quality retail properties.

"You have companies with thousands of stores looking for different ways to gain market share and attract traffic," said Brian Katz, the CEO of boutique retail real estate brokerage Katz & Associates. "They're finding that the traffic department stores once generated has kind of gone to an almost minimal amount in some mall environments. I don't think they'll abandon malls completely, but they'll selectively [choose locations] in different markets where they think they can successfully gain market share by being outside of a mall."

Executives at Bath & Body Works, the longtime staple of American mall culture, told analysts last week they would increasingly shift the bulk of its real estate portfolio to include more off-mall locations, a strategy they say will be crucial for the company's growth and future profitability. The soap and fragrance chain's footprint is roughly split between stores in traditional mall properties and those located elsewhere, but Bath & Body Works Chief Financial Officer Wendy Arlin said the retailer's off-mall outposts will ultimately make up more than two-thirds of its portfolio.

"Approximately 99% of our store fleet is profitable, and our stores continue to significantly outperform pre-pandemic levels, led by strength in our non-mall locations," Arlin said. She added that the retailer will continue investing in "increasing its off-mall penetration," and opened more than 15 new stores — all of which are located outside of traditional mall properties — for the quarter ending March 30. Even so, Bath & Body Works permanently closed eight stores, which Arlin said were "principally in malls."

Foot Locker, which had long operated the bulk of its real estate portfolio in mall-based locations — is pursuing its "lace up" strategy aimed at boosting profits by closing underperforming stores across American malls. Throughout the quarter ending March 30, the company shut 35 floundering outposts and boosted its share of off-mall square footage to 35%, up from about 30% at the same time last year.

The company is on track to close as many as 400 mall-based stores before the end of 2026.

Even for retailers uninterested in relocating or opening new locations, mall properties are among the first outposts to hit the chopping block.

For Gap — the parent company for iconic brands including its namesake label, Banana Republic, Athleta and Old Navy — its mall-based outposts were the first to be offloaded as part of a restructuring plan it kicked off in late 2020. The strategy will ultimately result in upwards of 350 closings before the end of this year between its Gap and Banana Republic brands, about 80% of which will be based in traditional malls.

There are plenty of reasons for retailers to ditch their locations in malls, Matthew Harding, the CEO of New Jersey-based retail real estate manager Levin Management, told CoStar News of tenants' moves to reach more customers. Some are leaving as a result of closures among department-store anchors, while others are adapting to pandemic-related trends in which shoppers prefer to be in a more community setting outdoors.

What's more, customers are looking for an experience, something GlobalData Retail's Saunders said traditional malls are failing to provide.

"The number of things shoppers are looking for is an engaging experience, and the places that deliver that experience do well, while those older malls don't work anymore," he said.

So what is working?

"The outdoor malls and mixed-use developments are doing well because they're often a lot newer and more modern and successfully blend in a mix of things that are interesting to customers," the analyst added. "They typically have been able to attract more niche brands and retailers with more food service, integrated leisure and sitting areas, and give people plenty of reasons to go there. Retailers want to be in those locations."

Another factor in retailers' emerging real estate strategies is an emphasis on storefronts that can also accommodate their e-commerce operations. Services such as buy online, pick up in store exploded throughout the pandemic, turning some retail outposts into an almost warehouse-like space that saved companies on shipping costs and industrial real estate.

Williams-Sonoma, which now bills itself as a "digital-first, but not digital-only" retailer, has closed or relocated dozens of mall-based locations over the past two years. It has redirected the capital to invest in its e-commerce platform, and CEO Laura Alber told investors earlier this year that the transition to better-performing locations has made it possible to expand some of its online shopping services and reposition its brick-and-mortar locations to act more as design centers and fulfillment hubs.

"There are some companies with large e-commerce businesses but no stores, and then some who have enormous stores, but they really don't invest much in e-commerce," Alber told analysts on the retailer's latest earnings call. "And we know that the multichannel shopper shops more, and it's the experience they're looking for. We're expanding what we do in these stores and using them differently, and that's a big advantage for us."

With fewer retailers interested in leasing space at traditional malls, landlords and developers are also considering a different approach: repositioning them.

More retail property owners across the country such as Brookfield and Kimco Realty are rethinking their use of space by incorporating other uses such as apartments, coworking spaces, hotels, entertainment venues or even warehouses in a bid to transition aging mall properties into higher and better uses.

By building upon the idea of creating a live-work-play environment, landlords are overhauling otherwise obsolete malls into mixed-use destinations that not only attract a steady stream of foot traffic from residents and office workers, but boost the property's appeal for retailers targeting space in the newly created ecosystem.

"Reimagined mixed-use districts can be great for retailers," CBRE's Isner said. "These types of efforts usually have good results in drawing new tenants to the site and getting fresh churn there. Especially if the properties are in great locations that are already built out and don't have much available space."

It's a significant investment for property owners, though, and the process of transitioning to alternative uses can often be riddled with bureaucracy, pushback from local residents or can simply be too expensive to pencil. What's more, if there are still a few retailers operating at the mall, any landlord would have to wait out their leases before making any substantial moves. Even then, however, the challenges aren't stopping many from pursuing plans for traditional mall properties that would otherwise be sitting vacant.

In the San Francisco suburb of Daly City, California, real estate investment trust Kimco is looking to add 400 high-end apartments to its Westlake Shopping Center, which opened in the 1950s. Across the bay in Richmond, California, industrial powerhouse Prologis dropped nearly $120 million to acquire the long-struggling Hilltop Mall and is pursuing plans to transform the site into a mixed-use hub.

The top two floors of the Arcade Providence in Rhode Island, one of the oldest enclosed malls in the United States, were converted into micro-loft apartments in 2014 and rented out quickly. The units were converted into condos beginning in late 2022 and quickly sold out, according to Robin Dionne, who was the director of outreach and client relations for the concversion project.

The former White Plains Mall in New York, built in the 1970s, was demolished late last year and is now a construction site for a nearly 900-unit apartment complex spearheaded by real estate developer The Cappelli Organization.

Even with all the changes rippling across the national retail real estate market, companies are proving themselves to be committed to brick-and-mortar space. Previously digital-only brands such as Warby Parker, Everlane, Untuckit, Rothys and others are investing in physical locations that support the brand image they are aiming to project.

"People are still going out and spending, and there are still lots of retailers looking at the market with optimism and seeing enormous expansion opportunities," Saunders said. "Sure there have been some failures, but those failures are because the companies or locations weren't good fits and didn't deliver what consumers now want. It's right that they pack their bags and be on their way, since that's how the market should work. It all creates a much better environment for shoppers and the whole retail sector than had existed before."