The coronavirus pandemic has had a huge impact on retailers this year, and malls are hurting for it. Many stores closed temporarily or permanently in 2020, while others stopped paying rent. That's left several mall REITs, or real estate investment trusts, in a serious lurch. In fact, PREIT (NYSE: PEI) was forced to file for bankruptcy in November, and while it's since emerged, it needs to shore up its cash flow and find ways to put sluggish space to good use.
In this regard, PREIT may already be moving in a positive direction. It recently secured approval to proceed with development of over 1,000 apartment units at its south New Jersey Moorestown Mall. The question is: Will more mall operators seek to follow PREIT's lead?
A constructive use for mall space
Not only did thousands of stores close permanently in 2020, but many more risk a similar fate in the course of the current year. Not only has the pandemic battered a number of retailers, but many companies, like Macy's (NYSE: M), were already making plans to shutter locations before the coronavirus outbreak began. Now, malls risk losing a host of tenants, from smaller stores to anchor stores, so getting into the residential game may be a good way to drum up cash and hop off a train headed for nothing but a crash.
These days, there's a huge demand for affordable rental units, and that demand could explode even further. Millions of homeowners today are hanging on by a thread, falling back on mortgage forbearance as their sole means of staying in their homes. Once that protection runs out, we could see a wave of short sales and foreclosures as homeowners come to grips with the reality that they can no longer keep up with their mortgage payments in the wake of the pandemic's financial impact.
While that will, in turn, spell opportunity for real estate investors, it will also create a housing crunch. So mall operators with sluggish locations have a real opportunity to capitalize on the need for rentals.
Malls have an advantage here because they tend to be conveniently located -- often, right on or adjacent to highways and other easily accessible roads. That alone is a draw for renters.
The Millionacres bottom line
While converting mall space to apartments is a move that will likely make a lot of sense for mall operators in the near term, it's also a time-consuming, expensive prospect. Malls' existing layouts will need to be reconfigured to allow for an apartment building setup. Zoning requirements will need to be met. Permits will need to be filed, and inspections will need to be had. All told, turning malls into apartments isn't an overnight process, so we may see a very limited number of converted properties in the near term.
In time, however, as malls increasingly start to struggle, we may see other operators follow PREIT's lead. And while that would, in turn, lead to a very different revenue stream, it's a better bet than relying on retail tenants that seem to be doing nothing but going out of business.