Malls rely on retailers to sign leases and pay rent -- it's how they stay afloat and make money. And so any time a major retailer makes plans to close stores, it's bad news for mall REITs (real estate investment trusts).
Such has been the case in the course of the pandemic. When the coronavirus outbreak first erupted, nonessential retailers were forced to shutter temporarily, which caused a notable hit to mall business. Since then, restrictions have largely been lifted, but given the greater economic crisis at hand, consumer spending hasn't been as robust, and many retailers have seen their revenue decline over the course of the past 12 months.
In fact, the Census Bureau recently released sales data for February, and it wasn't pretty. Last month, retail sales fell 3% on a seasonally adjusted basis. And the actual drop was much more significant than the 0.5% decline economists had previously predicted.
February's numbers paint a bleak picture
Declining sales could hurt retail revenue and set the stage for even more store closures. If that were to happen, malls would have a serious vacancy crisis on their hands.
When we dig a little deeper into February's numbers, there's some notably disturbing news. First, sales at department stores fell 8.4% from the previous month. While losing any tenant is a problem for malls, department store closures are especially dangerous because these retailers commonly serve as anchor tenants, taking up large amounts of space and drawing in customers. They're also hard to replace considering how much space they take up.
Secondly, sporting goods store sales dropped 7.5% in February. While that wouldn't be all that significant during normal times, it's notable right now because sporting and fitness retailers had been reporting positive numbers throughout the pandemic as many people shifted to at-home workouts and had taken to exercising outdoors.
Finally, furniture and home furnishings sales declined 3.8%. Throughout the pandemic, there's been a boom in home projects, with people being stuck inside their houses. To see those numbers drop is surprising -- and not the best sign.
Will retail sales improve in March?
While February's numbers are far from encouraging, March's retail sales number may be better. For one thing, a spell of bad weather battered the country in February, including areas like Texas that normally don't see such extremes. That could have impacted sales numbers and is clearly more of a temporary issue.
Additionally, lawmakers just passed a $1.9 trillion coronavirus relief package that includes a round of $1,400 stimulus checks per eligible adult. Once that cash infusion hits, consumers are apt to have a lot more money to spend at retailers.
In fact, in January, retail sales jumped 7.6% following a round of $600 stimulus checks that went out as per the relief bill that was signed in late December 2020. Given that this current stimulus round is far more generous, there's reason to believe retail sales could get a serious boost in March and April.
But will that be enough to prevent more widespread store closures? Only time will tell.
The Millionacres bottom line
Malls may need to think about expanding their tenant base beyond traditional retailers if they want to survive for the long haul. And mall REIT investors had better hope mall operators are able to get creative.