Shopping malls have dramatically evolved in the decade since the financial markets' collapse sent the retail sector into a tailspin. No longer simply a place to browse for clothes, they've been turned into branding showcases, amusement parks, and even destinations to pick up your e-commerce orders.
Although traditional retailing remains at the core of the appeal of a mall, the bankruptcies of retailers like Sears and Payless, as well as store closures by J.C. Penney, Macy's, and many other chains, mean the shopping mall is not a healthy place.
Malls are dwindling
Coresight Research estimates 12,000 stores will close this year, some 70% more than last year. And commercial real estate analyst Reis says that vacancy rates at neighborhood and community shopping centers fell 0.1% to 10.1% in the second quarter. It's the first time since the beginning of 2016 that rates have fallen, while regional-mall vacancy rates were at 9.3% in the second quarter, the same as in the first quarter.
Those rates likely would have been worse, but grocery stores are moving into the empty spaces. For example, Aldi is renting out Kohl's excess square footage, as is Planet Fitness. Reis says trampoline parks and discount clothing stores have also helped counter some of the losses.
But what if someone had been there to help retailers make it through the difficult times by giving them time to get back on their feet? Would that have changed how the retail landscape is seen today?
During the depths of the recession, it likely wouldn't have mattered because far too many consumers were too deeply affected for too long. But today is a different story, and it seems that before the situation is allowed to get any worse, there is at least one deep-pocketed benefactor ready to step in and lend troubled retailers a helping hand.
A successful model to follow
Regional mall operator Simon Property Group (NYSE:SPG) told analysts on its second-quarter earnings conference call that it was flush with cash and ready to dole out the money to help keep its tenants afloat.
David Simon, the mall operator's CEO, said the company has the not-inconsequential sum of $6.8 billion in liquidity, and he was ready to put it to good use in the right situation.
"We're certainly as good as the private equity guys when it comes to retail investment," he told the analysts, after having successfully invested in Aeropostale to save it in bankruptcy court. He believes now is the time that Simon Property Group can and should do it again.
Together with General Growth Properties, which is now owned by Brookfield Property Partners (NASDAQ:BPY), and Authentic Brands Group, which actually runs the business, the mall operators bought Aeropostale to save it from a total liquidation.
It wasn't an altruistic endeavor, since Aeropostale had about 160 stores in Simon Property Group malls while General Growth had 77 stores, meaning a liquidation would have left the mall operators with over 230 empty locations. Simon still owns 44% of the business today.
Although Simon hasn't repeated the model since, it is ready to do so again, though "we're only going to buy into companies that we think have brands and that have the volume that is worth doing it," David Simon told analysts. But it will do a deal only in concert with other investors, whether it's Brookfield, Authentic, or someone else.
The risks rise
While judicious investments could be smart and would give the mall operator a stake in a brand that could make a comeback, it's easy to see how such a scheme could also quickly go awry, especially if another recession hits and retailers start to slide again en masse. A Simon investment might stave off a collapse for its favored brands, but ultimately they might succumb anyway and exacerbate what would quickly become a tenuous position for the mall operator.
In a mild recession, shopping malls helping their tenants make it through the rough patch can work. But it also clearly concentrates the risk, and that might make it difficult to survive. During the Great Recession, General Growth Partners was forced into bankruptcy, and another downturn could affect mall operators more severely if they've become highly vertically integrated.