It's hardly a secret that the coronavirus pandemic was woefully unkind to shopping malls. For one thing, restrictions early on in the pandemic compelled many malls to shut their doors. Once malls were allowed to reopen, foot traffic was extremely sluggish in some spots as safety concerns kept consumers out of malls.
Compounding the problem was the record number of retail bankruptcies that took place in 2020. Some of those led to store closures. Other retailers made the decision to shutter locations outside of bankruptcy filings.
All told, shopping malls closed off 2020 on a pretty bleak note. And numbers recently reported by Bloomberg back that up.
A notable decline
Malls saw their real estate value plunge an average of 60% in 2020. Following a new round of appraisals, 118 retail mall properties lost a collective $4 billion in value compared to what they appraised for in 2019. And at this point, only about 50% of the country's 1,100 indoor malls have a good chance of staying open for the long haul, according to an analysis by Compass Point Research & Trading.
Of course, some malls stand a stronger chance than others. Those with fewer vacancies and in prime locations could continue to thrive in the coming years. But malls in largely abandoned locales that were seeing minimal foot traffic before the pandemic could soon be on their way out.
A new purpose for malls
The good news is that malls that aren't salvageable as retail shopping hubs could still be repurposed in the coming years. There's already been talk of converting some malls to apartments. Of course, going from commercial to residential use is a process, but it's an option nonetheless.
Other dying malls, meanwhile, could be converted to warehouses and distribution centers. There's been a huge boom in online shopping during the pandemic, and it's likely that digital sales will remain strong now that so many consumers have changed their habits. Repurposing malls as fulfillment centers therefore makes a lot of sense.
The rollout of coronavirus vaccines could drive some people back into malls -- but chances are, consumers will continue to favor digital orders and outdoor, open air shopping centers in the near term. Furthermore, a growing number of retailers are expanding their off-mall presence. In the next few years, these stores could take a lot of business away from malls.
Late last year, Coresight Research put out an estimate that 25% of U.S. malls could close within three to five years. That's a reality mall REIT (real estate investment trust) investors need to come to grips with. While Class A malls may have a fair amount of staying power, lower-tiered malls may soon cease to serve as shopping hubs as their value continues to decline.
Now if retail sales rebound nicely in 2021 so that store closures are halted and consumer sentiment shifts to embrace indoor shopping, it could be enough to stave off mall closures for a period of time. But at some point, investors will have to accept the fact that when it comes to malls, only the strongest are apt to survive.