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Can IKEA Save U.S. Malls?

Sep 25, 2020 by Maurie Backman

U.S. malls had their share of challenges before the COVID-19 pandemic began. Even prior to the crisis, major stores were shutting down and consumers were shifting to online shopping -- a model that's both efficient for them and most cost-effective for retailers.

But ever since the pandemic reared its ugly head, malls have taken an exceptional beating, from forced closures earlier in the year to capacity limits at present. The problem has gotten so bad that mall investors ought to be extremely concerned, especially given the number of failing or vacant malls that exist already.

Surprisingly, one chain is attempting to swoop up vacant mall space. An affiliate of Swedish furniture company IKEA recently purchased San Francisco's troubled 6X6 mall, a 250,000-square-foot vacant space that had not welcomed a customer in almost five years.

Furthermore, earlier in the year, Ingka Centres, the aforementioned affiliate, was in talks to acquire properties in a number of inner-city locations. It reportedly has its sights set on locations in New York, Los Angeles, San Francisco, and Chicago in particular.

A mixed bag for mall investors

Vacant mall spaces are bad news for retail investors across the board, so the fact that Ingka Centres is looking to put such locations to good use is encouraging. The mall operator is also looking to take over old post offices and department stores, many of which have closed in the course of the pandemic.

On the other hand, another major player in the shopping mall field could spell trouble for mall giants like Simon Property Group (NYSE: SPG), whose business has already been impacted by the pandemic. Though Simon has performed better than other mall operators, it's still struggled with rent collection and grappled with numerous tenants filing for bankruptcy.

In fact, Simon is so desperate to avoid mall vacancies that it recently entered into an agreement to purchase bankrupt department store and shopping center mainstay J.C. Penney (OTCM: JCPNQ). More competition for the country's largest mall operator could therefore hurt some retail investors.

As such, the news of IKEA affiliate Ingka Centres buying up unused mall space is really a mixed bag. To put a positive spin on it, investors should be encouraged by the fact there's interest in vacant spaces. Furthermore, the steps Ingka Centres wants to take to revolutionize malls might inspire other operators to go a similar route.

Ingka Centres intends to redefine malls as gathering places, not just transactional spaces. The company wants to focus on giving customers an engaging, fulfilling experience, and that's something a lot of malls in their current state may be lacking.

The bottom line

Of course, it may be awhile until Ingka Centres gets to bring that vision to life. With the pandemic still raging, mall operators will first need to get through the next few months and then focus on broader updates and plans. But for now, investors should take comfort in the fact that malls -- especially vacant ones -- aren't just being written off.

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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.