Shares of mall-focused real estate investment trust (REIT) Simon Property Group (SPG -0.04%) have been cut in half in 2020. The big picture is COVID-19, which came on top of the already difficult "retail apocalypse." It's pretty simple to say where Simon will be in a year from a big-picture perspective, but the important information is in the finer details.

It's going to be tough

Leading up to 2020, the big story in the mall sector was the retail apocalypse. There's a lot in that term, but basically: Heavily leveraged retailers that weren't able to keep up with consumer tastes, including an increasing desire to shop online, were falling behind their peers. Many were pulling back by shutting stores or, worse, going bankrupt. The key, however, is that this trend is bigger than online shopping destroying brick-and-mortar stores. Indeed, there are plenty of physical stores in expansion mode.

Two people with shopping bags standing in a mall

Image source: Getty Images

That said, in 2020, countries around the world effectively closed their economies to slow the spread of COVID-19. That hit retailers hard and exacerbated the troubles for heavily leveraged retailers. A large number have gone bankrupt in a very short period of time. Many of the companies that remain are looking to rationalize their footprints, with some choosing to close less desirable locations. That's bad news for mall-owning REITs like Simon, and the pain is going to linger for at least a year -- but probably much longer. 

So over the next year, Simon Property Group is definitely going to be dealing with significant headwinds created by store closures and retail bankruptcies. It's not going to be easy, and it's not going to be pretty. But to really understand what's going on, you need to look a little deeper.

No easy answers

A mall is an ecosystem curated and managed by the mall's owner. There are a number of aspects to this that are vital. For example, Simon takes great care to ensure that its malls and outlet centers (about 200 or so) are located in wealthy areas with large populations. Just owning any old mall isn't enough -- malls need to be in good locations. 

Moreover, malls require constant upkeep and updating. Few want to shop in an old mall that's in disrepair. Maintaining a desirable mall is an expensive process that never ends. But there's another piece to this process that often goes overlooked: The stores in the mall are just as important as the physical space they help to fill. A mall with stores that have fallen out of favor with customers is likely to draw fewer and fewer shoppers. Curating the retailers in a mall is just as important as maintaining the mall itself.

The retail apocalypse and COVID-19 are cleaning older, less desirable stores out of the U.S. retail system. This is a process that was already underway, but moving slowly. Now it is happening all at once. From Simon's perspective, however, it isn't as easy as just finding new tenants -- it has to find the right tenant for each mall. 

SPG Chart

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An over-the-top example might help. If you have a mall filled with high-end retailers like Gucci and Cartier, adding a Dollar Tree to the tenant list wouldn't work. The reverse would also be true, since adding Gucci to a mall filled with discount stores would be similarly problematic. 

Meanwhile, mall leases tend to have long terms. So a retailer in a less desirable mall may want to move, but its lease terms could prevent it from changing its address. On the other side, a mall owner like Simon might be stuck with a struggling retailer that's barely hanging on because of a lease agreement. In other words, changing a mall's tenants can take time, even in the best of times. 

It makes logical sense with all of the store closings right now that it would be easier to fill empty spots, but that's not true. The volume of store closings has been so high in 2020 that there's more empty space than new retailers to fill it. And thanks to COVID-19, the experiential tenants (like restaurants and gyms) that were starting to expand in malls are now struggling because of the nature of their businesses. Even retailers that are still expanding are likely taking a more cautious approach. 

More than a year's worth of problems

There are a lot of moving parts in a normal period for mall landlords like Simon Property Group, and COVID-19 has exacerbated the situation. One year will not be enough time for Simon to work through all of the problems it is dealing with right now. In fact, it may take several years to properly curate its malls. Meanwhile, the time clock for a true recovery won't really start until the world has moved past COVID-19.

There simply isn't an easy fix here, and investors who buy today should be prepared for a long recovery process.