Within the realm of real estate investing, 2020 will long be remembered as a year of epic store closures. Fueled in part by bankruptcy filings, many retailers were forced to shutter after months of stalled revenue.
But things have been looking up in 2021. Earlier this year, shopping center and mall traffic picked up as consumers grew more comfortable with the idea of making purchases in person. And now, JLL reports that 2021 could be the year with the least number of retail space closures since 2016.
But while that's undoubtedly good news for real estate investors, let's also not forget that store closures were very much a problem before the pandemic began. And so while the rapid pace of closures we saw last year may be waning, that doesn't mean shopping centers and mall REITs (real estate investment trusts) are out of the woods.
A slow drip
Store closures in 2020 were akin to a busted fire hydrant spewing water and flooding the road. Going forward, the hydrant may still be leaking, but it's more of a slow drip.
Unless there's a widespread economic shutdown like the one that took place in early 2020, stores are unlikely to shutter in rapid succession. But that doesn't mean we won't see a fair amount of closures in time.
For one thing, the pandemic taught a lot of people to shop online. That extends to consumers who may not have been so quick to embrace technology beforehand.
Now, pointing and clicking to buy items has become so mainstream that consumers will likely uphold that habit even once COVID-19 becomes a nonconcern. And that means that retailers will need to sink more resources into online order fulfillment, possibly at the expense of opening and operating stores.
Furthermore, as digital sales continue to boom, we'll likely see an ongoing stream of store closures as retailers opt to shutter underperforming locations and focus on bigger money-makers. We could also see larger stores replaced by smaller, pared-down versions -- a model that some big names in the retail space are already trying out. But even in that scenario, we're talking about retailers ultimately taking up less net square footage -- and potentially leaving malls and shopping centers to grapple with vacancies.
Should real estate investors be worried?
The future of shopping malls was precarious before the pandemic began, and these days, it's no different. As more retailers opt to open off-mall locations, shopping centers may see a decent influx of tenants. But malls could struggle in the near term, especially as anchor tenants make the decision to move out.
In the near term, we probably won't see a record-breaking level of store closures like 2020 brought about. But mall REIT investors in particular should brace for some rockiness, as it could take time for foot traffic to get back to pre-pandemic levels on a steady basis.
Shopping centers should fare better. There's less concern from a health perspective about driving up to a store, parking outdoors, running in, and running out. And a lot of the chains that are making plans to expand -- notably, discount and dollar stores -- are those that take up residence in shopping centers more so than malls. So while store closures could remain a problem for many years to come, it's malls that stand to bear the brunt of them.