It's fair to say that 2020 was a miserable year for retail across the board. And that includes department stores. In fact, a number of well-known department store chains wound up filing for bankruptcy and shuttering locations as a result of pandemic-related upheaval.
Thankfully, department stores had a much better year in 2021 than they did in 2020. But will their winning streak continue? Or should real estate investors stay on alert for department store closures -- and the blow that might deliver to shopping malls?
Mall traffic is still down
Though many major department stores saw an uptick in revenue in 2021 compared to the year prior, they might endure continuing struggles for one big reason: Customers aren't coming in to shop. Research from Placer.ai found that during the Black Friday weekend -- what's usually the biggest shopping weekend of the year -- foot traffic at indoor malls was down 8.5% compared to 2019. And that trend is likely to continue for a number of reasons, at least in the near term.
Image source: Getty Images.
First, many consumers shifted to shopping online early on in the pandemic due to health and safety concerns. Now that they're used to having goods delivered to their door, they might hesitate to revert to their old ways.
Furthermore, right now, coronavirus cases are surging on a national level thanks to the omicron variant. And while health experts are hoping this wave will be short lived, the reality is that we don't know how many more variants and waves we're in for.
As such, consumers might opt to stay out of malls -- especially indoor ones -- for the foreseeable future, or at least until case numbers decline substantially. That could take a lot of business away from department stores, since many of these stores' digital websites don't offer the same quality shopping experience.
Additionally, right now, inflation is making everyday-living costs more expensive. And some economists fear that we could be in for many months of elevated costs. As such, consumers may be forced to cut back on non-essential spending to ensure that they have enough money to cover their basics. And that means department stores might see less revenue as consumers are forced to make difficult choices.
Finally, let's not forget that the supply chain issues that plagued the 2021 holiday have far from resolved themselves (though to be fair, some backlogs have eased). That means department stores could end up spending a lot more to procure inventory in the coming months, thereby cutting into their revenue.
The takeaway? While department stores may have seen some improvement on the revenue front in 2021 compared to 2020, that doesn't mean it will be smooth sailing in 2022. And that's something real estate investors should be mindful of.
A hit to malls?
If department stores don't thrive in 2022, some may be forced to close. And that could deal a devastating hit to malls, since department stores commonly serve as anchor tenants, drawing in shoppers and smaller tenants alike.
Now to be clear, this isn't to say that department stores are definitely in line for a disappointing year. But investors with mall REITs, or real estate investment trusts, in their portfolios should be mindful of the challenges these chains might face -- and the impact those challenges could have on mall revenue.
