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Sorry, Investors: There's More Bad News About Malls

Nov 11, 2020 by Maurie Backman
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We all know 2020 has been horrendously unkind to retailers. Since the coronavirus pandemic began back in March, dozens of well-known brands have filed for bankruptcy, and many retail chains are making plans to close stores in the near term. That's bad news for shopping malls -- especially since several department stores have filed for bankruptcy, too. Throw in the fact that nonbankrupt retailers, like Macy's (NYSE: M), are making plans to move away from malls, and it's clear the outlook for shopping centers isn't good.

Recent data from Moody's (NYSE: MCO) Analytics REIS confirms this. In 2020's third quarter, vacancies in malls hit their highest rate in 20 years after rising 0.3% to 10.1%. Mall rents are dropping, too. The average mall asking rent decreased 0.7% during the quarter and 0.6% over the year.

While this data isn't surprising, it's just more bad news for mall REIT (real estate investment trust) investors and commercial landlords at a time when the industry is frighteningly sluggish. And if vacancies continue to rise, a growing number of mall operators may join the ranks of the bankrupt retailers who play a role in their demise.

Mall REITs are already in trouble

In early November, two well-known mall REITS -- CBL & Associates (NYSE: CBL) and Pennsylvania Real Estate Investment Trust (NYSE: PEI) -- filed for bankruptcy protection. CBL operates 108 malls across 26 states and was hurt by tenant bankruptcies. Pennsylvania Real Estate Investment Trust, meanwhile, operates 21 malls, mostly in the Philadelphia vicinity. It, too, has been impacted by bankrupt tenants.

Malls are in serious jeopardy these days due to an unprecedented number of store closures likely resulting from the coronavirus pandemic. In addition to losing standard retail tenants, department stores, which have long served as anchor tenants for malls, have been steadily going out of business. Replacing department stores is a tough ask, as these retailers typically occupy multiple floors of space. More importantly, they draw in both customers and tenants, and in their absence, malls lose out on more than just rent; they lose out on opportunity.

Also, many consumers aren't keen on visiting malls during the pandemic. In fact, earlier in the year, 32% of customers said they were uncomfortable shopping in malls -- and that was before coronavirus case reports reached a national high. Since the outbreak is unlikely to wane until a vaccine becomes widely available, malls are likely in for many more months of sluggish foot traffic. And as many retailers brace for a stingy holiday season, the vacancy crisis could grow exponentially, especially if the pandemic drags on well into 2021.

All told, it's just not a great time to be invested in mall REITs. While some operators are faring better than others and taking strategic steps to combat vacancies by expanding their tenant base, others may suffer the same fate as CBL and Pennsylvania Real Estate Investment Trust. Or to put it another way: Things may get a whole lot worse for the sector before they get better.

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Maurie Backman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Moody's. The Motley Fool has a disclosure policy.