Pandemic Makes Shopping Mall REITs Better Than Ever
Investors looking for gains in commercial real estate have been left baffled as the ongoing global pandemic disrupts the industry. As traditional retail businesses, offices and apartments falter, the humble mall, an epicenter of community shopping, proves its enduring value to neighbors and investors.
Changing purchasing habits have changed investment strategies in the real estate sector. As more and more products are sold online, the footprint of physical stores is changing. Understanding what is sold online is the key to understanding the future of brick and mortar retail. Fashion, technology and books are among the most commonly purchased items online. As a result, malls relying on department stores, clothing boutiques and key tenants like Best Buy or Barnes & Noble have struggled. Tenants of shopping centers occupy a unique position in relation to e-commerce. Your typical mall around the corner has local restaurants, beauty needs, financial services, gyms, and medical facilities, none of which can be purchased online.
Green Street’s monthly report on commercial property values shows community malls increased 14 percent in August and 25 percent year-on-year. The value of linear shopping centers has increased 6% from pre-pandemic levels. There might not be any glitz or glamor in neighborhood malls, but they are the backbone of many communities. The real estate value of shopping centers is backed by its public good for the region it serves. Giving nearby residents access to a dry cleaning, a quick coffee, a haircut, yoga classes or an ice cream cone increases local investment in the community, generating tax revenue and the growth of employment in your own neighborhood. Amazon is not going to sponsor a local little league team, but the local Italian joint could.
“There’s no proxy for this little mall, this little space to make a sandwich and send it to someone, for someone to come in and cut their hair. Until we have a computer mouse that will cut our hair or 3D printers that make burgers, you still need those neighborhood malls, ”said Todd Laurie, Executive Vice President of Fund Services and partner at Baceline Investments on a recent episode of The Motley. crazy live show.
The rapidly changing nature of the retail industry adapting to e-commerce means that shopping malls are becoming “lifestyle centers,” a term coined by the ICSC. Lifestyle centers are typically suburban retail developments in upscale neighborhoods with national chains of upscale specialty stores, restaurants, and entertainment. Many have multi-family dwellings attached, some even have hotels.
In the end, these centers are just another way to fix the real estate puzzle. The stores can be upscale and the overall development dense, but at their core they still provide the same basic services that almost shoppers want they can’t get online. The ICSC estimates that there are nearly 450 lifestyle centers open in the United States. These small malls are an answer to the questions that plagued mall owners. Instead of boring, cookie-cutter national chains selling products spread across seamless indoor spaces, local lifestyle centers offer a more tailored mix of services in a more intimate, community setting.
Internet-resistant retailers can help malls and lifestyle centers protect their value, but their location is what creates most of the value itself. Having the right business doesn’t matter if it doesn’t have the flow of food to vehicles to support them. The best malls are those located at key intersections. Convenience is of the utmost importance. Retail studies have shown that most spending is near home. “Near Me” is one of the best online search modifiers year after year. This is becoming more and more relevant as the trends in remote working continue. Without a commute to the more heavily marketed areas of the city, local malls see more shopping. Changing the commuting habits of workers means that purchasing habits change in nature. There may be fewer stops for a morning bite at the bakery, but the lunch activity is picking up. The pain for retailers in central business districts is the gain of retailers near them.
Buyers always spend a lot, what they spend is what changes. Retail sales are expected to grow nearly 14% this year, according to the National Retail Federation. The estimate has been revised up from the 6% growth forecast just six months ago. Grocery stores in particular have bolstered linear shopping malls. More than 2,500 new grocery stores over 5,000 square feet have opened in the past five years, according to data from the CoStar Group. The pandemic has made shopping mall REITs better than ever. The Hoya Capital Shopping Center REIT Index, which tracks the top 17 outdoor commercial REITs, has risen 48% this year, pushing many REITs above pre-pandemic highs. Perhaps most impressively, REITs posted 22% same-store NOI growth. Shoppers don’t just use local malls more, they spend more when they do. Occupancy rates are rising and leasing spreads remain positive.
It’s no surprise that smaller, more community-oriented malls have been more successful in adapting to community needs. Geographical proximity and personalized services that reflect the needs of the surrounding region have been a winning formula for decades. It doesn’t take fancy finishes, new developments or experiential retail to increase the value of linear malls. They might not be glamorous, but linear malls have long been one of the top performers in the retail industry. The only leading segment of online strip centers is high street retail.
It is important not to put retail in the same basket. Traditional shopping malls were battered during the pandemic, putting more nails in the coffins of many. Headlines on large distressed retailers belies the fact that retail spending is on the rise. The history of retail has always been a story of evolution. Nowhere is it easier to scale and adapt than in your local mall. Each business may face different prospects for its goods or services, but the value of its real estate is certain. Blockbuster may have disappeared from our neighborhoods, but the Blockbusters bankruptcy did not sink malls. The owners have adapted and filled the space with new tenants, meeting the changing needs of local residents. Shopping malls, as boring and drab as they are, are personal and important to the residents around them, making their value resilient.