SAN JUAN, P.R.—Puerto Rico’s government is struggling to pay its bills. But mall owners and retailers are betting that consumers on the island will keep on spending.
Fast-fashion retailer Hennes & Mauritz AB’s H&M plans to open its first store in the U.S. territory this year, at the 631,000-square-foot Mall of San Juan. Opened in March, it was the largest new mall on U.S. soil in 2015, according to real-estate firm CoStar Group.
Nordstrom Inc. and Hudson’s Bay Co.’s Saks Fifth Avenue made their island debuts at the Mall of San Juan last year, and other retailers are coming to the island or expanding operations. Retail landlords have invested tens of millions of dollars to upgrade their properties.
The moves amount to a high-stakes wager for mall owners and retailers who face a slow recovery across the U.S. and hope to find a sorely needed source of fresh revenue in Puerto Rico. But they come at a time when the island is contending with crushing public debt. “Puerto Rico’s got serious financial problems,” said Steve Sakwa, a real-estate analyst at Evercore ISI.
Landlords and retailers are counting on a number of factors to weather the storm, including an underground economy that means shoppers are wealthier than official statistics indicate, a lively tourist trade and a relative shortage of retail space compared with the rest of the U.S., according to executives and analysts.
“San Juan is one of the densest markets in North America,” saidRobert Taubman, chief executive of Taubman Centers Inc., a mall owner based in Bloomfield Hills, Mich., that spent about $475 million to build the Mall of San Juan. “We are extremely bullish.”
On Monday, Puerto Rico was expected to make most of roughly $1 billion in scheduled bond payments, but it said last week that it would miss about $37 million in payments due from public agencies, underscoring the severity of the island’s problems. In 2015, the island’s sales tax leapt to 11.5%, up from 7%.
The crisis adds to the challenges facing Puerto Rico’s consumers. The median household income is less than $20,000 a year, roughly half what it is in Mississippi, the poorest U.S. state by that measure, according to Census Bureau data. Nearly half of Puerto Rico’s 3.5 million people live in poverty.
“We don’t feel secure,” said Diana Domenech, a 45-year-old therapist who was shopping recently at Plaza del Sol, a mall in suburban Bayamon. “So I shop less right now.”
In recent years, hundreds of thousands of Puerto Ricans, who are U.S. citizens, have moved to the mainland. Migration is “the largest risk” to the local economy, said Heidie Calero, an economist who heads H. Calero Consulting Group Inc., based in San Juan.
Ms. Calero pointed to declines in sales of new cars and higher home foreclosures as signs of the stress. “You’re seeing evidence that the consumer is not that resilient,” she said.
But mall owners and retailers say they are protected from the problems because the island isn’t saturated with stores like much of the mainland U.S. There are five square feet of mall space per capita in Puerto Rico, compared with 23 square feet around the U.S., according to Taubman Centers.
Puerto Rico’s largest mall, Plaza Las Americas, is crowded with shoppers even on weekday afternoons. Retailers such as J.C. PenneyCo. say their Puerto Rico stores are among their best-performing locations.
“You’ve got lower supply and a consumer who loves to shop,” saidPaul Freddo, a former J.C. Penney executive who is now senior executive vice president for leasing at DDR Corp., which owns Plaza del Sol and 13 other malls and shopping centers in Puerto Rico.
DDR, based in Beachwood, Ohio, has spent about $50 million in recent years to upgrade its island properties, including moving a food court to the second floor at Plaza del Sol to meet demand for additional retail space, according to executives. Existing retailers at the mall include Wal-Mart Stores Inc. and Home Depot Inc.
The arrival of new retailers is a lure for Puerto Rico shoppers who had encountered stores such as Nordstrom and H&M only when traveling to the mainland or buying online. “I was eager to come here and see it,” said Fabiola Colon, 24, who was shopping in Nordstrom recently.
In addition, many consumers have more disposable income than official data might suggest, due to a lower cost of living and a lax tax collection system, experts say.
That was a key factor for Taubman in deciding to build the Mall of San Juan. The company tracked down data showing that more luxury cars were sold per person in the area than almost anywhere else in the U.S.
“That’s when you knew” the market could support a mall with some high-end stores, said William Taubman, the firm’s chief operating officer.
But planning and building the mall took more than a decade, partly because of red tape. In addition to Nordstrom and Saks, stores include LVMH Moët Hennessy Louis Vuitton and Urban OutfittersInc.’s Anthropologie.
The mall opened in March, just as the island’s fiscal problems were coming to a head. “They’re opening this at about as poor a time as you can,” said Mr. Sakwa, the analyst, who added that the property “may be too upscale for the marketplace.”
Robert Taubman, Taubman’s CEO, said the firm is confident the investment will pay off in the long run. But, he added, “There’s no question that we had headwinds, not tailwinds.”
Upscale chains set up shop on island despite massive debt woes
By Liam PlevenMall Owners, Retailers Bullish on Debt-Ridden Puerto Rico
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