There was a time when the idea of owning mall REITs (real estate investment trusts) was something I could get excited about. And to be clear, there are still plenty of opportunities to get into that particular space. Simon Property Group (SPG -1.67%), for example, has had a solid month so far, and as the largest mall operator in the country, there's plenty of reason to believe it's in a strong position to recover from the pandemic.
But for the most part, I'm very iffy on malls right now. Here's why.
Image source: Getty Images.
1. Department stores are leaving or shuttering
Malls routinely rely on department stores to serve as anchor tenants. To be clear, anchor tenants aren't always big money-makers for malls. Often, these tenants are able to secure steep discounts on rent. But what these tenants do is draw in customers and other tenants. And losing them is an unquestionable blow.
But malls are losing department stores. Macy's (M -2.12%), which has a huge mall footprint, has been expanding its off-mall locations. Meanwhile, other department stores, like Lord & Taylor, have shuttered completely in the aftermath of the pandemic. And then there are those like J.C. Penney (JCPN.Q), which are barely hanging on by a thread.
If this trend continues -- which is likely to happen -- malls might really struggle to fill vacant spaces and lure in replacement tenants. The result? Less revenue.
2. Digital sales are booming
The pandemic forced a lot of consumers to change the way they shop. Nowadays, more people are shopping online instead of hitting the stores, and that trend could easily continue as websites become more dynamic.
If consumers increasingly spend more of their money online, retailers might shift focus and start shuttering stores to sink resources into warehouses and fulfillment centers instead. But that could, of course, leave malls starved for tenants -- and the revenue they deliver.
3. Big-box retailers are getting more competitive
The one advantage malls have over the competition is variety. Walk into a mall, and you could conceivably have well over 100 stores to choose from.
But why visit a mall for variety when you could visit a one-stop-shop instead? These days, big-box stores are getting more creative in establishing partnerships to create shop-in-shop offerings for customers.
Take Target (TGT -0.67%), for example. Last year, the big-box giant teamed up with Ulta Beauty (ULTA -2.05%) to open makeup shops inside its stores. Earlier this year, it entered into a similar arrangement with Apple (AAPL -2.19%).
Because consumers often have easier access to big-box stores, and these stores commonly offer essential items like groceries, they're an obvious draw. And as big-box retailers become more mall-like by expanding their product offerings, actual malls could lose a lot of business.
Should you invest in malls right now?
Mall traffic was extremely sluggish during the pandemic but has picked up a lot since the summer. And there's reason to believe malls will enjoy a solid revival as things settle down with regard to the COVID-19 outbreak.
As such, I won't in any way say that malls are a bad investment. They're just not something I'm looking to invest in right now.
That said, not all mall REITs are created equal. If you're interested in entering this space, research different mall operators to see what their financials look like before writing off the sector as a whole.
