Photograph by Tom Schierlitz for Fortune; Prop: Yuji Yoshimoto—Studio UG; Styling: Rachel Haas—King Management

Simon Property Group Fights to Reinvent the Shopping Mall

With department stores in sharp decline, Simon is overhauling its empire to keep consumers coming back.

The Roosevelt Field shopping complex was built 60 years ago, in Garden City, N.Y., on the former Long Island airstrip where Charles Lindbergh took off on his historic transatlantic flight. But when you walk in, it doesn’t take long to realize this isn’t your mother’s mall—or even your own high school mall.

When you enter by the Nordstrom jwn , your attention is drawn not to one of those smudgy, indecipherable “You Are Here” map directories, but to sleek screens whose messages nudge you to shop the mall’s trendier fashion brands. Those same screens pepper you with reminders about an app-based loyalty program, which could help you snag the most coveted item on any shopper’s list—a premium reserved-parking spot.

As you pass leather couches flanked by charging stations for cell phones, you’ll see the refurbished food court—sorry, make that “dining district”—with eateries that eschew plastic plates and utensils for actual silverware, and furniture that says hipster bistro rather than cafeteria remainder sale. Roosevelt Field has significantly expanded its full-service, sit-down restaurant offerings as part of a $300 million overhaul. And throughout the mall, tasteful signage steers you to the new luxury wing, opened in February 2016 and anchored by (and named for) a state-of-the- art Neiman Marcus store.

The King of Prussia mall, in the suburbs of Philadelphia, is the second-largest in the U.S. Simon recently added 50 stores to the mall as part of a $200 million renovation.Photo: Courtesy of Simon

Hundreds of shopping centers across the U.S. are facing obsolescence, abandoned by shoppers who are going online or getting choosier about where they shop. But Roosevelt Field shows that there is still a lot of life in that American mainstay, the suburban mall. The 2.4-million-square-foot center generates about $1,000 in annual retail sales per square foot, according to real estate research firm Green Street Advisors—more than twice the national average for shopping centers. And in its combination of novelty, technology, and customer pampering, Roosevelt Field embodies the strategy that has helped its owner, Simon Property Group spg , navigate retail’s crisis to stay on top of the mall world.

Simon, a real estate giant with headquarters in Indianapolis, has relied on aggressive dealmaking and savvy property management to bolster its position as the largest U.S. operator and developer of shopping malls. Its U.S. portfolio includes 108 malls, most of them high-grossers like Roosevelt Field, and 72 discount outlet centers. That adds up to real estate worth $110 billion. Some of the biggest and most luxurious malls in the country— including the Forum Shops at Caesars Palace in Las Vegas, King of Prussia outside Philadelphia, and the huge high-end New York outlet mall Woodbury Common—are bastions of the Simon empire. (The company also operates malls abroad and owns 20% of Klépierre, a Paris-based mall operator with properties across Europe.)

“Reinvesting is what separates a good landlord from a not-so-good landlord.” —Edward Mui, Morningstar

The company generated $5.3 billion in revenue in 2015, with an enviable 37% profit margin. Simon’s revenue has grown every year since the Great Recession ended, and its market cap has risen fivefold since the end of 2008, to $57 billion. The key to that success: constantly adapting to figure out what sells, at a time when many of the businesses that fill its malls—especially department stores and apparel retailers—aren’t selling.

Along with a handful of other mall operators, including General Growth Properties (GGP), Taubman Centers, and Macerich, Simon dominates the so-called A-malls, those with the highest sales per square foot. To win in that category, Simon has been diligent about staying ahead of trends and modernizing its centers, and quick to replace struggling brands with those on the upswing. “We’ve cleaned a lot of stuff out, and we’re very sensitive to creating the environment where those retailers can do the most business,” CEO David Simon told investors in July. (The press-averse Simon declined to be interviewed for this article.)

Still, the company and its investors are grappling with the reality that being the No. 1 mall owner may soon be analogous to reigning as queen of the compact disc. Simon’s shares, which reached an all-time high of $229 in July, had fallen more than 21% by mid-November, reflecting concerns about how many of Simon’s tenants are struggling. Two of Simon’s three top tenants, Gap Inc. and Abercrombie & Fitch, have closed hundreds of stores in the past two years and have announced more to come; anchor department stores are shutting their spaces too. Green Street Advisors has predicted that 15% of U.S. malls could be in jeopardy in the next decade, the inevitable unwinding of years of overbuilding.

And so Simon cannot afford to rest on its laurels. The company has another $1.9 billion worth of renovations and new projects in the pipeline: Some 100 miles to the southwest of Roosevelt Field, Simon recently wrapped up a $200 million overhaul and expansion of the King of Prussia mall—adding space for 50 more stores in what’s already the second-largest mall in the U.S.

Simon is also at the vanguard of rethinking what kind of store fits in a mall. Many of Simon’s “boxes,” as the spaces are called in commercial real estate parlance, are being repurposed for occupants like Cheesecake Factory and fast-fashion retailer Primark. Simon has added 200 restaurants in its properties in the past five years. Other non-retail spaces that people want, like movie theaters and health clubs, are also proliferating.

Such reinventions can be expensive, but Simon is gambling they will pay off in future income increases—potentially the only way it can keep growing in a country that has more malls than it needs. “They’re always on their toes, reinvesting in their properties for that extra edge,” says Morningstar analyst Edward Mui. “It’s what separates a good landlord from a not-so-good landlord.”

For the moment, business looks good for the industry’s good landlords—Simon in particular. The company’s U.S. malls and outlets are 96.3% full (about four percentage points above the industry average). Sales per square foot are $604, a slight drop from a year ago but a full 27% higher than the industry average of $474, according to the International Council of Shopping Centers (ICSC), the industry’s trade organization.

But even the industry’s biggest cheerleaders acknowledge the risk posed by the wave of store closings. The five top department-store operators whose branches anchor so many malls—Macy’s m , Penney, Kohl’s kss , Dillard’s, and Sears Holdings shld — have together closed some 750 stores since 2013, or 20% of their fleets, and analysts think the Honey, I Shrunk the Retailer trend will continue. A spate of bankruptcies among mall stalwarts in the past two years, including Aéropostale, Wet Seal, Pacific Sunwear, and American Apparel, has also pressured landlords. And even highly successful stores like Nordstrom, Neiman Marcus, and Hudson’s Bay’s Saks Fifth Avenue are hurting these days.

David Simon, CEO of Simon Property Group.Dan Callister—Alamy Stock Photo

All those closures effectively put more brick-and-mortar retail space into the marketplace, potentially undercutting mall operators’ ability to raise rents. Analysts generally believe America is “overmalled” to begin with: There are 2,353 square feet of space of shopping centers in the U.S. for every 100 Americans, compared with 1,636 in Canada and 458 in Britain, according to CoStar Realty Information. From the 1960s through the 2000s, developers built hundreds of malls per decade. But since 2010, only nine new ones have been built (and many of those have been one-of- a-kind luxury projects, like the recently opened Westfield mall at New York’s World Trade Center). Green Street forecasts that rents will grow only a modest 1.5% a year through 2019.

And all this, of course, plays out against the backdrop of changing consumer habits. Online shopping has siphoned many consumers away from bricks and mortar. And smartphones and shopping apps have transformed mall-going for those who still show up. “There is no need to window-shop or go to 12 different stores if they’ve already researched online,” says D.J. Busch, a senior real estate analyst at Green Street. All these factors make a day at the mall especially unappealing when the stores look as though they haven’t had a makeover since L.B.J. was in the White House. The upshot: A market able to support five malls a few years ago might need only three now.

Simon Property, so far, has rolled with these punches. Bankruptcies have always been a fact of life in retail. David Simon is fond of pointing out that only three of his 10 top tenants from 1993, when Simon Property went public, still exist in their current form. But he and his best-performing competitors have moved quickly to upgrade themselves. After the recession, Simon and GGP gradually spun off or sold most of their malls that had weaker overall sales, while ramping up investments in their better ones. One example of how that has paid off: Of the 100 or so stores Macy’s said this summer it would close by the spring of 2017, only one is at a Simon-owned mall.

For all their problems, department stores are still essential to mall operators: GGP says that 70% of its mall customers visit a department store. So Simon has been proactive in assisting anchor tenants like Neiman Marcus. At Roosevelt Field, the company not only named its new luxury section the “Neiman Marcus Wing” but also began holding glitzy occasions aimed at bringing in shoppers, like influencer powwows hosted by leading fashion bloggers and stylists. “They’ve stepped up the quality of their events,” says Neiman CEO Karen Katz. “They’ve done such a great job of promoting Neiman Marcus in the Simon branding within the mall.”

And if big stores close anyway? Simon has a strategy for that too. Over the past 15 years, Simon has redeployed 90 vacant department stores in order to gut them and remodel them to accommodate other retailers and businesses that are potentially more profitable. “The industry’s been able to absorb the store closings by repurposing that property for things that drive higher foot traffic,” says ICSC CEO Tom McGee—including for those very un-mall-like grocery stores, spin-class fitness shops, and entertainment centers.

There is irony in Simon Property’s having to reinvent itself to adapt to a new retail world—because the company essentially invented the old one.

Back in 1960, Melvin Simon, the company’s Bronx-born founder and David’s father, teamed up with his brothers Herb and Fred, forming a trio of machers who came to be known as the “Marx Brothers of Malls.” The brothers pioneered the concept of a shopping center being anchored by a department store. Before that, department stores tended to be in city centers at stand-alone locations. The Simons’ idea was to leverage the shopper traffic of department stores, which at the time were the apex of the retail food chain, within enclosed malls where those giants were the marquee attractions. To make that happen, they charged department stores a pittance while charging other tenants much more. Even today the typical anchor store pays around $4 per square foot in annual rent; the average non-anchor tenant paid $42.22 per square foot a year as of the third quarter of 2016, according to real estate analytics firm Reis.

The anchor model took hold, and over the ensuing decades, Melvin Simon & Associates grew into a shopping center behemoth, becoming the largest real estate investment trust to list shares on the stock market with its 1993 IPO. Three years later Simon mushroomed when it merged with rival DeBartolo Realty. As malls’ organic growth began to wane, dealmaking prowess became an essential skill for anyone hoping to move into the corner office.

Roosevelt Field Mall in Garden City, N.Y., one of dozens of older malls that Simon has overhauled in the past two decades.Photo: Courtesy of Simon

Enter David Simon, Melvin’s eldest son. In 1990, Melvin asked David to come home to Indianapolis from New York, where he was an M&A banker for the renowned boutique investment firm Wasserstein Perella & Co.; David became CEO in 1995. The survival skills he learned in the rough-and-tumble Wall Street milieu, mixed with his familial temperament, made David a fearsome negotiator. “Even though I was born and raised in the Midwest, when you have a father from New York, it kind of rubs off on you in terms of your aggressiveness,” Simon told a group of Wharton School students in 2009.

That aggressiveness helped Simon land a succession of deals in the late 1990s that transformed Simon into the first truly national mall developer, in what had been a localized, fragmented market. In 1997, Simon bought the Retail Property Trust for $1.2 billion in a hostile takeover, acquiring 10 prestigious properties, including the high-end Westchester in White Plains, N.Y. A year later Simon snagged Corporate Property Investors (CPI) for $5.9 billion, getting its hands on prized malls like Roosevelt Field. And in 2004 it bought Chelsea Property Group, a $3.5 billion deal that instantly turned Simon into the largest operator of high-end outlet malls—including Woodbury Common in New York’s Hudson Valley, which rakes in $1.3 billion a year in sales by some estimates.

“[Retailers] chased the holy grail of internet sales, to the detriment of their physical product.” —David Simon, CEO

At the same time, Simon was also proactive in ditching less productive malls. In today’s mall economy, “there is much more of a split between the winners and losers,” says Barbara Denham, an economist with Reis. In 2014, Simon spun off most of its so-called B-and C-malls—those with lower sales per square foot—into a new REIT, called Washington Prime Group. That deal left Simon with a higher proportion of the most productive malls than most other REITs—and a nice supply of cash to keep those malls updated.

Still, Simon Property and its competitors are now at a turning point. After years of consolidation, there’s not much more room to grow via M&A. Over the years Simon has tried and failed to acquire its biggest rivals, including GGP, Taubman, and Macerich (in 2015). Now Simon finds itself in an era of experimental partnerships. In September, for example, in its first such move ever, Simon joined with GGP and other investors to buy Aéropostale out of bankruptcy and keep it afloat.

Mall operators are also trying to master shopping tech before it masters them. Simon created a venture capital arm in 2014 that has invested, along with partners such as GGP, in e-commerce companies like Deliv and Shopkick, a shopping loyalty app. Simon pumped more than $20 million over the past two years into small tech companies, among them a dress-rental service for weddings called Union Station, and Fashion Project, a marketplace for deeply discounted clothes. Talking with Fortune about one of his company’s most in-demand app features, GGP CEO Sandeep Mathrani was both upbeat and sardonic about the technology. “We are spending a lot of money to guide you to a parking space,” he says.

If you want to get a rise out of David Simon, tell him mall traffic is declining.

It’s easy to see why that narrative has taken hold, given that one retail CEO after the next has bemoaned declining mall traffic to explain weak sales. (It’s as popular as blaming the weather or, this fall, the presidential election.) But Simon has been pushing back against retailer kvetching for years. In 2012, at an industry event hosted by retail-focused investment bank Financo, J.Crew CEO Mickey Drexler complained that the intense smell of popcorn at one mall was keeping customers away from a J.Crew store. “I’ll take all your space back right now,” Simon shot back.

In fact, Simon says, traffic isn’t declining at the A-malls, and independent statistics back him up on that. “They don’t keep track of the mall traffic. We keep track of the mall traffic,” Simon told a conference in June, with some pique. “I mean, these are my clients, but I do think they need to be crisper in how they describe it.” At other times he has laid much of the blame squarely at the feet of the retailers themselves. “They’ve chased the holy grail of Internet sales, to the detriment of what they should be doing with their physical product,” he told Wall Street analysts in October.

The Roosevelt Field shopping complex was built 60 years ago, in Garden City, N.Y., on the former Long Island airstrip where Charles Lindbergh took off on his historic transatlantic flight. A new luxury wing, opened in February 2016 and anchored by a state-of-the-art Neiman Marcus store.Courtesy of Simon

Still, even if retailers revive their brick-and- mortar strategies, the diminishment of department stores’ hegemony means the average U.S. mall will look a lot different in five years. In fact it could be back to the future. Until the 1970s, U.S. malls had a much broader mix of tenants: It was standard for a shopping center to have a supermarket, a drugstore, and services like dry cleaning and shoe repair. That could well become the norm again, as it is in Canada and Europe. There are still 443 department stores at Simon malls, but the company is already heading in the direction of diversification: At the College Mall in Bloomington, Ind., one of the company’s original malls, Simon recently demolished a defunct Sears, and it is putting a Whole Foods wfm 365 discount grocery, an Ulta, and other smaller stores in the same space.

As more department stores downsize their fleets, smaller retailers could end up playing the anchor role—in other words, getting a big rent break from operators like Simon because they bring in so many shoppers. By one estimate, hosting an Apple aapl store lifts a mall’s overall sales by 10%. Presently, 55 Simon malls have an Apple, while 15 have a Tesla store, another draw for the well-heeled.

Green Street’s Busch says it’s conceivable that landlords could charge a fast-growing retailer (these days, a T.J. Maxx or Ulta Beauty would fit that bill) a rent similar to what they pay at strip malls. That would typically be $8 to $15 per square foot per year, according to various industry estimates—not as good a deal as the department stores get, but still a worthy tradeoff for the traffic they draw. Like many analysts, Busch sees the current department-store wreckage as an opportunity: “It could be a catalyst for where the mall should have been going all along.”

There are plenty of up-and-coming retailers in the wings to pick up other slack, including retailers that started out exclusively online. On GGP’s most recent quarterly earnings call, Mathrani reminded analysts that eyewear retailer Warby Parker could grow to have 1,000 stores, while web-based men’s clothier Bonobos has said it would get to 100. Amazon amzn reportedly has plans for hundreds of bookstores. “There’s going to be plenty of opportunity for retailers that want to expand to find locations,” says Mark Hunter, managing director of retail asset services at commercial real estate consultancy CBRE.

To see data charts showing why shopping malls are in trouble, click here.

The shift away from traditional apparel retail is already making itself felt. Food and beverage, for example, now makes up 9% of leasing space in U.S. malls, according to ICSC, and industry executives expect that to grow. Adapting to trends like these costs money and is likely to pinch REIT profits. But with their traditional tenants languishing, they have little choice.

And the continual churn of reinvention at Simon’s malls shows that it isn’t living in the department-store past. At an investor conference in June, David Simon predicted, “You’re going to see, at the end of the day, the better malls will get bigger and better and more diverse, and some of the other fringe retail will suffer.” It’ll be his job to keep the family business as far as possible from that fringe.

A version of this article appears as part of the 2017 Investor’s Guide in the December 15, 2016 issue of Fortune, with the headline “Reinventing the American Mall.”

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