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Mall REITs Like Simon and Brookfield Need a (Different) Contingency Plan

By James Brumley - Apr 13, 2021 at 10:42AM

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Owning your rent-paying tenants isn't a solution if those tenants are part of an industry that's fighting for its very survival.

Several indicators point to the pandemic finally abating, at least in the U.S. Stores and restaurants are (for the most part) operating at greater capacities, while schools are more likely to be meeting in person now than they were just a few months ago. But not every retailer is bouncing back as the contagion comes back under control, partly because they are no longer there.

According to data from Moody's Analytics, vacancy rates at regional and super-regional malls stand at a record-high 11.4% as of the end of the first quarter. Dig a little deeper and you'll discover that rents being collected per square foot of retail selling space are considerably lower than they were a year ago. Of course, that would be expected when supply increases and demand falls.

Thus far, major mall owners like real estate investment trust (REIT) specialists Simon Property Group (SPG 0.80%) and Macerich (MAC 2.53%) have managed to shrug off the headwind. Indeed, Simon and Brookfield Property REIT (BPYU) co-acquired struggling department store chain J.C. Penney out of bankruptcy in December. That purchase follows Simon's other 2020 acquisitions of Forever 21, Brooks Brothers, and part of Lucky Brand Jeans. In a similar vein, Brookfield Asset Management (BAM 1.24%) -- parent to Brookfield Property REIT -- earmarked $5 billion last year to help save struggling retailers, exchanging funding for minority stakes.

Store Closing signs hung from the ceiling inside a shop

Image source: Getty Images.

Such deals just make good business sense. These retailers are also mall tenants, after all. Saving them means preserving rent payments.

This retailer/landlord duality could prove problematic in the near future, though. While the pace of store closures should slow from here, a couple of different outlooks suggest we're still nowhere near the end of the retail apocalypse.

43,000 store closings and counting in six years

It's difficult to pinpoint exactly when brick-and-mortar retailing peaked and the retail apocalypse began in earnest. But 2015 looks like the year things started to get really, really bad. Credit Suisse estimates more than 5,000 storefronts were shuttered that year, and after a 2016 lull to just over 2,000 closings, the U.S. retailing industry lost roughly 9,000 stores the following year, nearly 6,000 in 2018, and more than 9,000 stores the following year, according to Coresight Research.

Last year's pandemic-riddled environment culled somewhere on the order of 12,000, says CoStar Group. In total, that's around 43,000 stores closed in the span of just six years.

And it's not over yet -- not even close. Coresight Research predicts another 10,000 storefronts could be closed this year alone, and investment bank UBS forecasts that a whopping 80,000 stores in the United States could close down between now and the end of 2026.

We're already seeing clear signs that retailing isn't meaningfully participating in any recovery. Moody's Analytics' first-quarter report indicates overall nationwide retail vacancy rates are now at 10.4%, up 40 basis points from a year ago, extending a long-lived uptrend into record territory.

The United States' retail space vacancy rates reached a record high of 10.4% during the first quarter of 2021.

Data source: Moody's Analytics. Chart by author.

Perhaps worse for mall-centric landlords like Simon Property and Brookfield, UBS's outlook suggests the clothing and accessories arena will suffer more than its fair share of these closures. That's most malls' core offering, and a key reason vacancy rates at regional supermalls have already hit the aforementioned record of 11.4%.

Unsurprisingly, rent prices are plunging as a result. Typical real estate rent prices fell between 10% and 25% last year, depending on the location and the nature of the locale. Given that the continued contraction in the number of retail stores will only add to the growing list of vacancies, look for more downward pressure on rent prices.

Bolstering the risk to landlords that also own retailers is the potential need for future cash injections.

See, mall REITs like Simon and Brookfield need competing retailers to survive, as shoppers don't want to visit a relatively vacant mall. If those competitors fold, though, Brookfield and Simon may feel compelled to support their already-sunk costs by throwing even more cash at their retailing ventures just to keep them afloat.

Connecting the dots

There are exceptions to the trend -- sort of. REITs like Federal Realty Investment Trust (FRT) are relatively well-shielded from the closure issue in question, as Federal Realty's focus isn't traditional malls. It's the owner/operator of strip malls and open-air malls situated closer to where people live, and increasingly, where they want to shop and eat. As of the end of last year, 92.2% of its portfolio was leased, down slightly from a rate of 94.2% a year earlier.

Malls aren't faring nearly as well, however. Simon's recently reported occupancy rate of 91.3% is better than average, yet down considerably from the year-ago comparison of 95.1%. Brookfield's retail occupancy rate is down from 96.4% to 92.5% for the same timeframe. It's not a dramatic turn for the worst, but unless UBS and Coresight are completely wrong about the future, those figures are going to get much worse before they have a chance to get better.

Bottom line? As well-grounded as these two and other mall REITs may be, simply buying retailer-tenants to keep them around isn't a viable long-term solution. They're under enormous pressure, and many of them may not be able to sustain themselves for much longer.

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Stocks Mentioned

Simon Property Group, Inc. Stock Quote
Simon Property Group, Inc.
SPG
$95.68 (0.80%) $0.76
Brookfield Asset Management Inc. Stock Quote
Brookfield Asset Management Inc.
BAM
$45.02 (1.24%) $0.55
The Macerich Company Stock Quote
The Macerich Company
MAC
$8.93 (2.53%) $0.22
Federal Realty Investment Trust Stock Quote
Federal Realty Investment Trust
FRT
Brookfield Property REIT Inc. Stock Quote
Brookfield Property REIT Inc.
BPYU

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