The COVID-19 pandemic disrupted lots of businesses, but few were hurt more than mall owners. Most mall tenants are considered nonessential businesses, and crowded indoor malls could easily turn into deadly breeding grounds for the novel coronavirus. As a result, most malls were forced to close their doors in late March. Many tenants stopped paying rent shortly thereafter.
However, malls have started to reopen around the country over the past two months or so. If a recent press release from mall heavyweight Macerich (NYSE:MAC) is to be believed, traffic is picking up quickly and things should soon be back to normal. Yet investors should take this bullish update with a grain of salt. Recovering from the COVID-19 pandemic is likely to be a slow and painful process for mall owners.
Positive signs for mall traffic
Macerich is one of the biggest mall owners in the U.S., owning all or part of 47 indoor and outdoor malls, as well as a handful of other properties. Last Thursday, the REIT "announced that all 47 of the company's major retail properties nationwide are now open for business."
That triumphant opening statement didn't tell the whole story, though. In the following paragraph, Macerich acknowledged that nine properties in New York, New Jersey, and Pennsylvania "currently offer limited retail operations." So far, only retailers with separate exterior entrances have been able to open their stores at those properties. For the most part, other tenants are limited to curbside pickup.
Macerich also provided detailed traffic figures for a handful of malls. South Plains Mall in Lubbock, Texas reopened on May 1, and traffic recovered to 93.5% of 2019 levels by June 14. Vintage Faire Mall in Modesto, California fully reopened on May 22 and was up to 97.1% of its 2019 traffic by June 14. More broadly, Macerich CEO Tom O'Hern observed that "in many cases, the longer a property has been reopened, the higher the traffic numbers," suggesting that consumers are steadily returning to their old routines.
These data points are certainly encouraging. Other mall owners have also reported positive trends. Nevertheless, Macerich shareholders shouldn't start popping the champagne based on a small dose of anecdotal evidence.
Don't believe all the hype
One reason to be skeptical of Macerich's sunny outlook is that the two properties approaching 100% of 2019 traffic levels are located in midsize cities. Yet Macerich primarily focuses on owning properties in dense urban markets. Indeed, the top three U.S. metro areas -- New York, Los Angeles, and Chicago -- account for about a quarter of its properties.
All three of those regions have been hit much harder by the COVID-19 pandemic than places like Lubbock and Modesto. That could make consumers much slower to return to their previous shopping habits compared to what Macerich has observed in other markets.
Additionally, lax adherence to social-distancing rules could be a double-edged sword for mall owners like Macerich. In the short run, mall traffic could rebound as people satisfy their pent-up demand for shopping, dining out, and so on. But if the consequence is an uptick in COVID-19 cases, it could quickly lead to a slowdown or outright reversal in the reopening process.
Indeed, on Friday -- just a day after Macerich put out its press release -- Apple announced that it would temporarily close 11 stores that had recently reopened, because of rising COVID-19 case counts in certain states. Five of those 11 stores are at Macerich properties in Arizona. Given that Apple stores tend to generate a lot of foot traffic, these temporary store closures will undoubtedly put a dent in the pace of the traffic recovery for those malls.
This isn't going to be easy
Despite improving traffic at some of Macerich's properties, it would be naive to expect a sustainable return to 2019 traffic levels until it's crystal clear that the COVID-19 pandemic is on the wane. Meanwhile, the damage from the pandemic could be the last straw for many retailers that were already struggling, causing a surge of bankruptcies. Other retailers are reassessing their business models and may shrink their store fleets dramatically while leaning more on e-commerce in the future.
As a result, Macerich and other mall REITs are going to face tough times over the next year or two. Mall occupancy and average rents are likely to come under pressure, and mall owners may need to invest significant sums to reposition their properties.
I own shares of Macerich because I believe strongly in the value of the REIT's properties. Sales per square foot surpassed $800 last year: a testament to the quality of its malls. Thanks to strong demographics and management's efforts to curate an attractive tenant mix, most Macerich malls should remain desirable to prospective tenants, allowing the REIT to gradually fill the vacancies that may pop up this year. However, it's going to be a slow process. Investors expecting a V-shaped recovery for Macerich are likely to be disappointed.