Retail, which is finally making its comeback after a rocky year and a half, is considered one of the riskier asset classes among commercial real estate (CRE) today. At the start of the pandemic, e-commerce was already redefining how consumers shop, but COVID-19 accelerated the trend of shopping online by leaps and bounds, putting tremendous pressure on brick-and-mortar retail operators. Malls, in particular, are being forced to find ways to adapt to these changes in order to survive.

Simon Property Group (NYSE:SPG), the largest mall real estate investment trust (REIT) in the industry, has finally recovered from the March 2020 crash. But there are certain risks investors still need to consider. Here's a closer look at how risky Simon Property Group is.

People shopping in a mall.

Image source: Getty Images.

Global mall domination

Simon Property Group is the largest mall operator in the world and the fifth-largest REIT by market capitalization. Its presence is massive, having ownership or interest in 196 indoor and outdoor malls across North America and 36 malls in Europe and Asia. Given the impact of the pandemic on brick-and-mortar retail, it's no surprise that 2020 was a tough year.

Simon's net operating income for the year was down 17.1%, and funds from operations (FFO) were $2.67 less per diluted share to $9.11 for the full-year. Occupancy fell from 94.7% in Q3 2019 to 91.3% by year-end 2020. In 2021, Simon said goodbye to two malls in Georgia and Montgomery, Alabama, letting them go to foreclosure while handing over the keys to additional properties in Ohio and Wisconsin, both strategic moves to reduce debt and mitigate losses.

Malls are making a comeback

As bad as things were in 2020, 2021 is showing positive signs for recovery, with Q3 2021 exceeding pre-pandemic performance as compared to Q3 2019. This strong comeback is largely thanks to the company's aggressive expansion efforts during the downturn of the pandemic and the return of in-store shopping.

During 2020, Simon Property Group took aggressive expansion actions, acquiring 80% of Taubman Realty Group (which added 26 malls to its portfolio) and purchasing bankrupt retailers Forever21, Brooks Brothers, and part of JCPenney in partnership with Brookfield Property Partners. In 2021, the company launched its first special purpose acquisition company (SPAC), raising $345 million to invest in a yet-to-be-determined alternative asset class outside of malls, and completed the development of a new mall in South Korea while commencing three other redevelopment or new development projects.

The company's strong performance in Q3 2021 led Simon to increase its earnings projections for the full year -- its third consecutive quarter for increasing projections -- and is a testament to the recovery the company is seeing. But it still has some major hurdles to overcome. Its occupancy is 92.8%, which is still below pre-pandemic levels, and its base rents per square foot are down 7.3% compared to the prior year's results.

Demand for retail space in malls appears to be improving , however, revenues are still suffering from lease renewals and new executions at lower rates than previously. It may take time before things fully recover if they ever do. Some people think the heyday of malls will soon be a thing of the past. If that is the case, Simon may have to explore more creative ways to use its space. In 2020, the company was in discussion with Amazon to turn unused stores into Amazon fulfillment centers, but nothing came to fruition.

Every investment has risk

Share prices have rebounded from its pandemic lows, meaning Simon is not the value buy it was several months ago. It is well funded, with $8 billion in cash and cash equivalents on hand, but the company still carries a heavy amount of debt having $25 billion in mortgages alone. For Simon Property Group, the degree of risk really comes down to your outlook on the future of malls and brick-and-mortar shopping. Simon has proven its ability to adapt and pivot to survive, but will its adaptations be enough?

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.