While you’ve been paying attention to failing malls, these shopping centers are thriving.

As Macy’s and Sears close hundreds of stores, the divide between America’s best and worst malls is widening. But it isn’t only the weakest properties that are losing ground.

Just as retailers shutter stores to funnel resources to their most coveted spaces, major mall owners are doing the same. Having already sold off many of the weak links in their portfolios, operators like General Growth Properties and Simon Property Group are now pouring money into their existing centers — in a bid to make them even more powerful.

These prosperous malls tend to be located in high-density, affluent or tourist markets, and have grown sales at a double-digit rate over the past five years, according to Fung Global Retail & Technology.

Yet at the same time these properties are thriving, hundreds of others are teetering on the edge of survival. And while stories of once-flourishing malls have been well-telegraphed, there’s noticeably less conversation about the emerging rift between top- and second-tier properties.

 
Pittsburgh mall sells for just $100

Pittsburgh mall sells for just $100.

That divergence will become even more evident moving forward, as technology forces bricks-and-mortar properties to compete for a smaller slice of consumers’ spending, Bill Taubman, chief operating officer of Taubman Centers, told CNBC.

“The bigger store that has the bigger selection will even differentiate itself from the No. 2 store in the market,” said Taubman. His company’s portfolio includes prominent centers like The Mall at Short Hills in New Jersey.

A death knell for floundering malls

Taubman’s point was succinctly summed up earlier this month, when Macy’s released the list of 68 stores it had marked for closure. While many assumed those stores were located in failing malls, an analysis by CoStar found that two-thirds of them were actually in “A” or “B” malls. The biggest takeaway, according to the commercial real estate research firm, was that 60 percent of the affected stores were within 10 miles of another Macy’s.

That could put other No. 2 malls in the crosshairs as more store closures are announced. Another 44 pairs of Macy’s stores are within 10 miles of each other, according to CoStar — and it isn’t the only anchor closing stores. In addition to Sears and Macy’s, J.C. Penney CEO Marvin Ellison said earlier this month that his chain will also downsize.

Malls that lose multiple anchor tenants are particularly vulnerable, as those losses can be a death knell for a property. Though several major mall owners have been able to fill these types of vacancies with sporting goods chains or entertainment concepts, the departure of multiple anchor tenants can often signal bigger problems for a property or market.

Namely, it could be an indication that the fundamentals of the market no longer work, perhaps because of high unemployment or a decline in population. It could also be a sign that a once-dominant mall has been usurped by a new neighboring property.

That was the case for the Highland Mall in Austin, Texas, a 1.1-million square foot property that lost its J.C. Penney store in 2006, according to Morningstar. When the nearby Domain in North Austin center opened a year later, many shoppers abandoned the Highland Mall. That property then lost Macy’s and Dillard’s, before it eventually closed.

Highland Mall, Austin, Texas

Highland Mall, Austin, Texas

Garrick Brown, a vice president of research at Cushman & Wakefield, told CNBC that a metropolitan area that once boasted 12 malls is likely now down to seven or eight. Eventually, that number will likely drop down to five or six, as more shopping is done online. CoStar’s Suzanne Mulvee agreed that even in some of the better metropolitan areas, it doesn’t make sense to have multiple stores.

“The highest-quality malls will always have a retailer that wants to be in their center,” Jim Sullivan, president of the advisory and consulting group at Green Street Advisors, recently told CNBC. “As you move down the quality spectrum things start to get dicey.”

A self-fulfilling prophecy

While the closure of anchor stores undoubtedly plays a role in a shopping center’s health, there are several other factors at play. The best malls tend to have a few things in common: They’re located in affluent, highly populated markets that are tourist or economic hubs; and they’re owned by major mall operators who have the cash to make them even stronger.

One example is Simon Property Group’s King of Prussia mall, outside of Philadelphia. In August, that property completed a 155,000-square-foot expansion that brought in 50 new, mostly high-end tenants, including Cartier, Jimmy Choo and Diane von Furstenberg.

Simon did not disclose the cost of its King of Prussia investment. But in an earnings release one month earlier, the firm said it was spending $2.1 billion on redevelopment and expansion projects at 33 properties that were under construction.

“It becomes a self-fulfilling prophecy in the sense that the investment by the landlords and the tenants continues to be made in the ‘A’ properties, so the ‘A properties become more interesting and exciting,” Taubman explained. “[That] then leads them to have more investment and it becomes sort of a virtuous circle.”

This is especially true as the pipeline for new projects has slowed.

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Indeed, just 20 percent of the country’s best malls generate nearly three-fourths of mall revenues, according to Fung’s report. That makes it possible for their owners to funnel more money into upgrades. Financing for “A” malls also remains available and at attractive pricing, according to Green Street’s 2017 Mall Outlook.

It’s harder for struggling malls to turn themselves around, as their declining economics make it difficult to find cash for investments. In its same outlook report, Green Street noted that lending standards have tightened further outside of the “A”-mall space, as lender criteria have become more and more stringent.

Malls with less than $400 per square foot in sales “must check other boxes,” like being the best retail option in a small market, Green Street said in its report. Otherwise, these properties are being shut out of the commercial mortgage-backed securities market and forced to seek financing through banks, smaller insurers or debt funds.

Since 2010, 74 commercial mortgage-backed securities loans backed by regional malls have liquidated, according to an October report by Morningstar.

According to Green Street’s 2017 Mall Outlook, there are more 300 malls in the U.S. that are considered “C” quality. They are the most at risk of closing over the next several years, the report said.

Technology is also expected to play a greater role in the bifurcation of shopping centers, as it enables consumers to make convenience-oriented purchases on their phones or computers. They can therefore save their bigger trips for the better centers, even if they’re farther away, Taubman said.

Where people live will also continue to have an impact, as Americans move closer to work. This flight to urban cities is putting more pressure on suburban centers, in particular.

“Those malls are clearly challenged at this point,” MasterCard Advisors’ Sarah Quinlan said at the Financo CEO Forum in New York City earlier this month.

Originally from CNBC.COM