The Great One, Wayne Gretzky, is famous for saying, “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.” The same analogy can be used with investors (minus the hockey puck). We want to invest in the industries and trends that are going to be successful over the next 20 years, not the last 20 years. One trend becoming clear is that many brick-and-mortar shopping malls are not going to survive. This trend makes sense intuitively as we see more people shopping online.
Shopping malls and investment risk:
Commercial real estate investments tied to shopping malls has not worked out well for investors in recent years. Developers loved to build large scale malls before the internet revolutionized shopping. The number of malls peaked in the 1990s at around 1,500. Currently, only 1,000 malls are left in the United States. A report from Credit Suisse last year predicted that 25% of the remaining malls will be bankrupt by the end of 2022. A shuttered mall can be an eyesore for the community for many years because it takes so much money to redevelop the space. Some of the malls that have shut down have been redeveloped into community colleges or apartment complexes.
The failure of one or more anchors (Macy’s, Sears, J. C. Penney) often leads to a death spiral for the mall and its remaining tenants. Many of the 2,500 mall stores that closed last year were national chains such as Stride Rite, Gap, Hallmark, and Men’s Wearhouse. Sadly for my three pre-teen daughters, Claire’s was one of the most recent chains to file for bankruptcy.
Which malls/retailers will survive?
The states seeing the most mall closures are: Texas, Pennsylvania, Ohio, New York, and Illinois. There is even a website that tracks mall closures: deadmalls.com, where you can see which malls have shut down by state. Malls that cater to affluent shoppers are the ones that are surviving. They are typically anchored by stores like Saks Fifth Avenue, Nordstrom, or Neiman Marcus. The malls of the future are being designed less for retail shopping (e.g., apparel) and more for lifestyle and entertainment such as bars, restaurants, and movie theaters.
Stocks of most retailers and retail commercial real estate has disappointed investors over the past few years. There are 36 REITs (real estate investment trusts) in the NAREIT Retail index. That index was down 4.77% last year, while the Dow was up 25% and the S&P 500 was up 19%. This year, the NAREIT Retail index is again lagging the overall market by about five percentage points despite its generous 4.84% dividend yield.
Some traditional retailers have made the adjustment to efficient retail operations combined with online sales. Costco is a standout in brick and mortar retail, but its competitor Sam’s Club is closing 63 stores this year. I am sure there will be some investing opportunities in the retail wreckage, but for now, investing in traditional retailers will continue to be filled with landmines.
Have a great week.