What happened

Shares of mall real estate investment trust (REIT) Macerich (NYSE:MAC) rose as much as 25% in early Friday trading on Wall Street. Following along were peer Pennsylvania REIT (NYSE:PEI), industry giant Simon Property Group (NYSE:SPG), and outlet center-focused Tanger Factory Outlet Centers (NYSE:SKT), which rallied 17%, 16%, and 14%, respectively, at the open of trading. To understand what happened, investors need a little bit of background.

So what

The U.S. economy was, effectively, shut down in an effort to slow the spread of COVID-19. Nonessential businesses, like many of the ones that rent space in malls, were shut down by the government. Citizens were asked to practice social distancing. And places where people gather in large groups, the very purpose of an enclosed mall, were closed to the public. It was a devastating blow to mall REITs, just as it was a devastating blow to mall REIT tenants. 

People walking in a busy enclosed mall

Image source: Getty Images.

One of the stronger landlords in the space, financially speaking, Tanger went so far as to offer its tenants two months of rent deferral, no questions asked, to help its lessees manage through a period with little to no revenue coming in the door. Penn REIT did its best to work with the situation, helping tenants as it could, but with materially more leverage on its balance sheet, it couldn't make an offer like that -- or easily live without rent for two whole months. In fact, it has been selling assets in recent years to help pay down debt. Being shut down by the government has not been helpful.   

That said, financially strong Simon has decided to take a strong line with tenants, recently taking one of its largest lessees, GAP, to court over unpaid rent bills. The REIT is looking to win $66 million in the suit, but is more likely making a statement about the sanctity of its lease agreements. The company is the bellwether name in the industry, so its actions could easily start a trend.

But things have been getting better. For example, Macerich proudly announced on May 19 that it had reopened 20 malls. Like its, peers it wanted to act as quickly as possible, within health guidelines, to get shoppers back in its malls and tenants' stores reopened. Progress has been seen in this effort throughout the mall REIT space even as some names appear to be on the brink of bankruptcy, like CBL, which recently missed a debt payment.   

Ultimately, there's a high-wire act going on today in the mall space as struggling retailers and landlords try to get back on track following the COVID-19 shutdown. Some will make it, some may not. However, one of the biggest lingering risks is whether or not shoppers will be able to afford to come back and spend. 

As nonessential businesses were shut down, a huge number of people lost their jobs. It wasn't particularly clear how quickly those impacted would get back to work -- which brings the story up to June 5 and an unemployment report that was much better than expected. Investors took that to suggest that the U.S. economy was recovering more quickly than many feared and bid up stocks across the board. Mall REITs were one of the big beneficiaries. 

Now what

Although the economic news today was positive, investors shouldn't get too excited. Financially weak malls still have debt-heavy balance sheets. They were struggling before COVID-19, and the current events won't make the situation any better. Stronger landlords, meanwhile, still have to get their facilities open, deal with additional costs (for things like cleaning) and regulations, and convince customers that going to a mall is even a desirable thing to do. 

And then there's the troubling fact that the unemployment rate that Wall Street has decided was so exciting was still a troublingly high 13.3%. Yes, that's better than the near 20% rate some had suggested was possible, but it's hardly a good number. Indeed, there's still a high likelihood that the effort to slow the spread of COVID-19, which appears to have achieved its goal, still ends up pushing the United States into a recession -- which would not be good news for mall REITs or their tenants. Today's gains are exciting, but expect more volatility here.   

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.