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2 Reasons Outlet Centers Will Fare Better Than Malls in the Near Term

Oct 08, 2020 by Maurie Backman

The year 2020 has been a brutal one for malls. For example, in February, before the coronavirus outbreak erupted, Macy's (NYSE: M) announced it would be closing 125 stores over the following three years.

Then in March, the pandemic exploded. In its wake, a large number of mall staples have filed for bankruptcy, including department stores like Lord & Taylor, which have traditionally served as anchor tenants. Throw in that many consumers are worried about shopping at malls and retailers have been forced to operate at limited capacity due to public health mandates, and it's clear mall investors have plenty to worry about.

But not all malls are created equal. While shopping centers have taken a beating in the past few months, it seems outlet malls may be the exception. In fact, while foot traffic to U.S. malls owned by publicly traded real estate investment trusts (REITs) declined about 15% year over year during the week ending Aug. 9, foot traffic at outlet centers was slightly higher than 2019 levels during that time frame.

While that's just a single snapshot of consumer behavior, here are two reasons outlet centers may fare better than traditional malls over the next year.

1. They're often outdoors

Health experts say COVID-19 is more easily transmittable in indoor settings than in outdoor ones, and so the fact many outlet centers are outdoors could work to their advantage. Granted, customers at outlet centers still have to enter stores individually, but they're at least able to spread out in the open air between store visits. That could make for a more comfortable shopping experience, especially as we head into the holiday season, when foot traffic is likely to pick up.

Of course, in some parts of the country, that outdoor aspect could hurt outlets, as consumers may not want to go shopping in 30-degree weather. But in places where winter isn't so extreme, outlet centers may have a clear advantage in the coming months.

2. They offer discounts

Many Americans have seen their income take a hit in the course of the coronavirus pandemic. Meanwhile, those who haven't lost income may be spending more conservatively or cutting back on nonessential purchases to secure their finances in case things get worse. So outlet centers may fare better than traditional malls because they're known as discount shopping hubs. And at a time when being frugal is back in fashion, that could be a tremendous draw.

What do the next 12 months have in store for malls?

While outlet centers may do reasonably well in the coming year, at least compared to traditional indoor malls, real estate investors will still need to brace for more store closures. The coronavirus pandemic is far from over, and anyone with money in malls or mall REITs should prepare for some pretty rocky times ahead.

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Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.