Despite big rallies over the past year, mall real estate investment trusts (REITs) have been suffering since around 2016 or so. It's important to understand the reasons why and even more important to grasp the vital nuances of the big picture. Both of these will help to explain why the CEO of Macy's (M -1.03%) recently sang the praises of physical retail stores, even as the company looks to keep closing brick-and-mortar locations.

Was it really the internet?

At one point not too long ago, the only way to buy something was to go to a physical store or call up a catalog retailer. Then the internet came along and created a whole new sales channel, propelling Amazon into a household name as it eviscerated the retail book industry.

The simple story was that it was cheaper and easier to buy online than to shop in a store, especially as shipping costs and times shrank. The model quickly migrated from books to just about every other form of product you can think of.

A person comparing pans in a store.

Image source: Getty Images.

Retailers started closing stores and, in some cases, going bankrupt. The trend got labeled the "retail apocalypse." But there's more to this than there seems.

For example, very often the retailers that struggled failed to keep up with their customers. Yes, that included lagging behind with the online experience. But it also involved things like merchandising missteps. Both were often exacerbated by high levels of leverage, which inherently limited a retailer's ability to make needed changes. In the end, onerous debt loads were the real reason why once-iconic names like J.C. Penney and Brooks Brothers ended up in bankruptcy court.

That doesn't mean there aren't material retail headwinds related to the growth of online shopping. For example, Macy's has been shutting stores for years and plans to announce an additional 10 sites that are slated for closure in January. That said, it has a list of 60 total planned closures it's currently reevaluating.

An about-face for the retail industry?

CEO Jeff Gennette explained during Macy's third-quarter 2021 earnings conference call

Our data validates that in markets where we have a physical presence, our online business is stronger. The interplay between traditional and physical assets is more important than ever, and we are focused on establishing an appropriate footprint in markets that drive our sustainable and profitable omnichannel growth. 

Gennette isn't the only CEO making this kind of statement, either. During Chico's FAS's (CHS) annual meeting in June, the company noted: "Stores continue to be a strategic asset. Digital sales are typically higher in markets where we have a retail presence." The fashion retailer is still closing stores, but it is making sure that it keeps the ones that will best benefit overall sales.

Meanwhile, American Eagle (AEO -0.81%), which is still growing its overall store footprint, has been stressing that "digital + stores = frictionless, convenient shopping." The retailer is looking to right-size its store footprint, but it certainly isn't looking to go all digital. In fact, it has been buying distribution businesses with the hope of helping mall competitors with their distribution needs, because the more shoppers that go to malls, the better its American Eagle and Aerie brands will perform.

The key theme here, however, is having stores located in the right locations. And that plays directly into the hands of the biggest and best-positioned mall landlords, like Simon Property Group (SPG -0.51%), Tanger Factory Outlet Centers (SKT -1.70%), and Macerich (MAC 2.35%), which generally own the most productive properties.

Moreover, as weaker mall properties close because tenants are leaving and, thus, customers stop showing up, the remaining malls become even more valuable. This reverse-network effect is an across-the-board statement, too, applicable to both consumers (who have fewer malls to shop in) and retailers (that have fewer malls into which stores can be placed). 

The truth isn't so simple

Wall Street often takes a complex story and creates a simple narrative that misses the important subtleties. The wholesale shift toward online shopping, dubbed the retail apocalypse, is a good example. The reality is that the interaction between physical stores and online sales is complex and may even be complementary.

In fact, the pandemic may have actually helped the retail sector in the long run, clearing out the weakest names, thus reducing competition, so the strong could survive and thrive. And that's likely to keep bolstering the malls that house them for years to come.