Shopping mall operators Simon Property Group (NYSE:SPG) and Brookfield Property Partners (NASDAQ:BPY) just bought J.C. Penney in bankruptcy for $1.7 billion, and have acquired -- either together or separately -- several other retailers that went under.
With Macy's (NYSE:M) preparing to close a fifth or more of its existing stores while expanding into smaller stand-alone buildings and other off-mall locations, and mall traffic already weakened before the coronavirus pandemic struck, is there any hope that shopping malls can survive?
Malls face a crisis. Although foot traffic is bouncing back to pre-pandemic levels, with outlet malls like Tanger Factory Outlet Centers doing the best because of their outdoor design, tenants are in serious financial difficulty. And that's rubbing off on the mall owners.
CBL and Associates Properties (NYSE:CBL) is about to declare bankruptcy as low- and mid-tier malls have borne an even larger share of the retail industry's burden than their Class A brethren like Simon Property Group.
Tenants have gone on rent strikes during the coronavirus outbreak to conserve cash, and though many mall operators have renegotiated rents during the crisis to help them survive, this summer Simon and Brookfield sued Gap over its missed payments. Other retailers including Saks Fifth Avenue are having eviction proceedings started against them, and some will just never open their doors again.
The path Simon Property Group and Brookfield Property are taking in buying up bankrupt businesses is a risky one since they will end up with a portfolio of failed businesses that the market has already decided are better off dead.
Yet both have committed billions of dollars to prevent vacancies from overtaking their malls because that could lead to even greater declines in customer traffic and a domino effect of more bankruptcies. J.C. Penney, for example, has a presence in 63 of Simon's malls, or about half, while upscale men's retailer Brooks Brothers, which Simon just bought, is in 29 malls.
It was even more crucial for the mall operators when they bought Forever 21. The fast-fashion icon had about 100 stores in Simon malls, representing about 1.4% of its rent base, and it represented 2% of Brookfield's rents.
Unfortunately, this simply looks like they're jamming their fingers in the dam to keep it from collapsing. E-commerce became an integral part of how consumers navigated the pandemic's forced closure of retail stores, so the physical locations have become more irrelevant.
In a post-pandemic world, where we've been conditioned to fear large crowds in tight spaces, packing consumers into shopping malls increasingly seems like an anachronism.
A strange new world
Not all malls are going to die, but the experience of CBL says many will. Top-tier centers like those that make up the portfolios of Simon and Brookfield will undoubtedly survive, and even Macy's says it plans to keep a presence in Class A venues while it exits others.
The problem for investors who might be interested in buying Simon or Brookfield stock is that the mall operators have added a wild card by becoming both landlord and tenant, and not with the best businesses at that.
Also, operating a retailer is different from running a mall, which complicates the matter further, even if the two landlords do have brand managers like Authentic Brands Group handling the day-to-day running of the businesses.
Shopping malls won't disappear overnight, but they will increasingly turn into ghost towns, and this could mark the beginning of the end for malls as we know them.