The coronavirus pandemic changed many aspects of life. Many children spent the better part of the past academic year learning from home instead of in schools. Employers did their jobs remotely instead of coming into an office. And consumers stayed away from physical stores and opted to do their shopping online -- an option that's proven to be as convenient as it is safe.
In fact, consumers across the globe spent $900 billion more at online retailers in 2020 compared to the prior two years, according to the Mastercard Economics Institute. And digital sales made up about $1 out of every $5 spent on retail globally, representing an increase from about $1 out of every $7 spent in 2019.
But online shopping is unlikely to be a temporary trend. For one thing, the pandemic isn't yet over, and so a lot of consumers may opt to continue making online purchases in 2021 as they wait for things to improve. Furthermore, online shopping is extremely convenient, and it can even lend to cost savings (e.g., not having to fuel up a vehicle and drive to different stores week after week). As such, there's a good chance many consumers who are already used to online shopping will uphold that habit well into the future. But that could seriously change the landscape of shopping centers and malls.
An uptick in e-commerce could cause stores to shutter
From a general economic standpoint, online shopping serves the key purpose of pumping money into retailers' coffers. But if more consumers shift to e-commerce, it could force retailers to rethink their physical presence -- and start shutting stores left and right.
There's already been a notable uptick in retailers seeking out warehouse space. Gap (NYSE: GPS), for example, is investing $140 million in a massive Texas distribution center as part of its plan to close down underperforming stores and focus on digital sales instead. And if e-commerce continues to explode, more retailers with a large mall and shopping center presence will likely follow suit.
The problem, however, is that while industrial real estate investment trusts (REITs) might pick up steam as a result of this shift, shopping center and mall REITs could get hammered. Many malls were already grappling with empty storefronts and reduced rental revenue before the pandemic began. And in the course of 2020, numerous retailers filed for bankruptcy and closed stores as a result. But if online shopping continues to dominate, retailers may make the strategic decision to operate fewer stores and instead focus on online order fulfillment. It's a move that could result in cost savings and added profit for them.
Malls and shopping centers, however, could face an unprecedented vacancy crisis if retailers close stores at a rapid clip to concentrate on online sales. And that's precisely why shopping center and mall REITs may be a more precarious bet for real estate investors, at least in the near term.
The reality is that once the pandemic truly comes to an end and consumers no longer have to be fearful to enter a mall, in-store shopping could really pick up -- especially since people may grow tired of being cooped up at home or staring at a computer screen for longer than they have to. But until the pandemic concludes and new shopping patterns begin to emerge, it's fair to assume that shopping center and mall REITs will remain a shaky investment.