It's easy to blame the demise of malls on the pandemic. Last year, we saw a record number of retail bankruptcies, with numerous store closures to follow. And that's been very bad news for malls, given their reliance on those tenants.
But the reality is that malls were in trouble before the pandemic began. Online shopping and big-box stores have been putting the pressure on for years, driving customers away from malls and robbing them of the revenue they need to stay afloat. And while foot traffic at malls has been better in 2021 than it was in 2020, the outlook for malls is still iffy.
Last summer, Coresight Research estimated that 25% of U.S. malls would wind up closing within the following three to five years. All told, that's a whopping 250 malls closures. And while some mall operators -- notably, giants like Simon Property Group (SPG -2.07%) -- are well-poised to stay the course, smaller operators could end up in a very different boat next.
So what should real estate investors expect from malls in 2022? In the absence of a crystal ball, we can't say for sure, but here are some patterns that are likely to emerge.
1. Lower-tiered properties could go dark
Class A malls -- those that bring in the most revenue -- may do quite nicely in 2022. While there's been a definite shift to e-commerce among consumers of all ages, the reality is that many people prefer to do their shopping in person and enjoy the social aspects of hitting the stores. This means malls that typically see a steady stream of foot traffic should expect similar results in the coming year.
It's Class B and C malls that investors should worry about more. Those located in poorly trafficked areas could see an even steeper drop in foot traffic as consumers adapt to online shopping. And given that these malls are more likely to be grappling with vacancies going into 2022, their outlook isn't all that positive.
2. Anchor tenants could disappear
Malls commonly rely on department stores to serve as anchor tenants, drawing in not only consumers but also other retailers. In the past few years, we've seen department stores -- notably, Macy's (M 1.04%) -- move away from malls and open standalone locations instead. That trend is likely to continue into 2022, driving some malls into crisis mode.
3. Malls could become mixed-use properties
Given the number of vacancies some malls may have on their hands come 2022, it wouldn't be surprising to see more properties adapt and convert to mixed-use spaces. Right now, there's strong demand for urgent care clinics, and malls could serve as a prime location for them. We may also see some malls undergo partial conversions to residential housing in situations where that's cost-effective enough to make sense.
4. Malls may focus more on entertainment
Given that consumers have discovered the ease of online shopping, malls will have to work harder to become an actual destination. To this end, we could see some properties up their game by expanding their food courts and offering more on-site entertainment.
The past couple of years have been rocky ones for mall REIT (real estate investment trust) investors. Though some malls may be in a great position to thrive in 2022, we shouldn't be shocked to see a string of closures. Mall operators that are willing to adapt and get creative will put themselves in a stronger position to survive the pandemic and close out 2022 in a more positive place.