By Esther Fung and Sebastian Herrera
Simon Property Group Inc., the biggest mall owner in the U.S., has been in talks with Amazon.com Inc. to turn some of its anchor department-store spaces into Amazon fulfillment centers, according to people familiar with the matter.
For Amazon, more fulfillment centers near residential areas would speed up the crucial last mile of delivery. For Simon, turning over what was once prime mall space to fulfillment centers shows it would be willing to relinquish an essential way to bring in more mall traffic to secure a steady tenant.
Simon's discussions with the online retailer have been under way for months and began before the coronavirus pandemic, these people said. The two companies have explored converting stores formerly occupied by J.C. Penney Co. Inc. and Sears Holdings Corp. into Amazon distribution centers; in some cases, Simon and Amazon explored buying out occupied space from the retailers, these people said.
The talks reflect the intersection of two trends that predate the pandemic but have been accelerated by it: the decline of malls and the boom in e-commerce.
It wasn't clear how many stores are under consideration for Amazon, and it is possible that the two sides could fail to reach an agreement, people briefed on the matter said. Simon malls have 63 Penney and 11 Sears stores, according to its most recent public filing in May.
Simon, which is the largest U.S. mall landlord by number of malls, is also considering other options for its vacated big-box spaces, say people familiar with the matter.
A number of U.S. malls are already doing business with Amazon, such as renting parking lots to Amazon's huge van fleets. But for Simon to lease a large, well-located indoor location would be the rare instance of a major mall operator offering prime retail space to Amazon.
"To replace department stores, mall owners considered schools, medical offices and senior living," said Camille Renshaw, chief executive officer of B+E, a real-estate investment brokerage firm. "With the current pandemic, industrial is the only thing left now."
A hookup between Simon and Amazon would show how retail and logistics -- especially delivery for the critical last mile -- are converging more rapidly.
Many retailers use their stores as mini-fulfillment centers to speed delivery of online purchases, particularly since the pandemic curtailed in-person shopping and curbside pickup became a new alternative. Amazon would likely use the department-store space for a smaller version of its huge distribution centers, relying on vans to navigate suburban streets, analysts said.
Simon Property said it has entered into logistics ventures with some retail tenants to help with their fulfillment needs. Mall owner Washington Prime Group also has a new venture that leases space to retailers such as Dick's Sporting Goods for inventory clearance.
Malls' strategic locations often make them attractive as distribution hubs. Many are near main highways and residences. Amazon has already acquired the sites of some failed malls and converted them to fulfillment centers. FedEx Corp. and DHL International GmbH have done the same.
Amazon has also been in talks with multiple mall landlords about putting its coming grocery-store chain in J.C. Penney locations, according to a person familiar with the matter, though it couldn't be determined if that included Simon malls.
Simon's negotiations with Amazon also illustrate how critical it is for large mall operators to fill big-box vacancies, and the sort of compromises they might be willing to make. Sears and J.C. Penney have filed for bankruptcy protection and each continues to close dozens of stores. Other department stores such as Lord & Taylor also filed for bankruptcy early this month, while Nordstrom Inc. closed 16 stores in recent months.
These big-box spaces are typically more than 100,000 square feet and often span more than one level. Smaller mall tenants have counted on traffic to department stores to spill over to neighboring retailers, and many have clauses that allow them to reduce rents or break their leases if the department store stays empty.
Having an Amazon fulfillment center could still trigger some of these co-tenancy clauses, but some landlords say even that scenario would be preferable to keeping that yawning space vacant.
Still, Simon's other tenants might not celebrate a deal with Amazon. Many blame the giant online retailer for severely disrupting their business. Its presence as a new neighbor would likely do little to pacify them, especially if Amazon's new distribution capabilities in well-located Simon malls helped make it even more competitive by helping speed up its delivery times.
Fulfillment centers wouldn't draw much additional foot traffic to the mall, though some employees could eat and shop at the mall. That is why landlords have preferred to replace department stores with other retailers, gyms, theaters or entertainment operators. Yet many of these tenants are struggling to survive during the pandemic and aren't in expansion mode.
Simon would likely rent the space at a considerable discount to what it could charge another retailer. Warehouse rents are typically less than $10 a square foot, while restaurant rents can be multiples of that. Depending on when the leases were signed and their locations, department-store rents can be as low as $4 a square foot or as high as $19 a square foot.
But Amazon's growth and healthy balance sheet would make it a reliable tenant at a time when most retail business has been waylaid by the pandemic. Simon, which owns 204 properties in the U.S., has had to contend with a ramp up in retail tenant closures in recent years that has accelerated during Covid-19.
Simon and Brookfield Property Group are putting in a joint bid for J.C. Penney Co., which filed for bankruptcy in May. By taking over the department-store chain, it gives them control over the store space and certain rights such as making changes to the parking structure, exits and access to shared space and roads.
Write to Esther Fung at firstname.lastname@example.org and Sebastian Herrera at Sebastian.Herrera@wsj.com