Even before the coronavirus outbreak was on anyone's radar, the retail apocalypse was threatening malls and making real estate investors in that sector very nervous. But then the pandemic hit, and it battered malls even more.
In the course of the ongoing crisis, dozens of well-known retailers have filed for bankruptcy and made plans to close stores in the process. Throw in the fact that almost one-third of shoppers were too scared to enter malls at the height of the outbreak, and it's fair to say that 2020 dealt malls a very harsh blow.
At this point, malls are looking to stage a much-needed recovery. But two popular brands are now threatening their very existence.
The move away from malls
Over the past year, a number of retailers have talked about abandoning malls and opening stand-alone stores in shopping centers instead. The logic behind this move is twofold.
First, establishing a shopping center presence gives retailers a chance to attract customers without the same competition that would normally be found in a mall setting. Secondly, some consumers are still skittish about entering packed, enclosed shopping areas due to pandemic-related concerns. Off-mall stores in shopping centers help solve that issue to some degree.
And, stand-alone stores lend better to BOPIS. Short for buy online, pick up in stores, BOPIS proved to be a popular option for consumers when the pandemic was raging on a national level. It gave shoppers the best of both worlds -- the ability to make and retrieve same-day purchases without having to spend an undue amount of time walking through store aisles.
Macy's (NYSE: M) and L Brands (NYSE: LB) are two companies particularly focused on moving away from malls. Macy's is in the process of opening five new off-mall locations, including Market by Macy's, a trendy concept store designed to grow its customer base. The department store giant has also been closing underperforming mall locations in an effort to cut costs and boost sales.
Meanwhile, L Brands, which owns Bath & Body Works and Victoria's Secret, two mall mainstays, is expected to open 50 new locations outside of malls this year and close anywhere from 20 to 40 mall-based stores. At this point, a good 47% of its Bath & Body Works stores are already located outside of malls.
Bad news for investors
Real estate investors who own mall REITs (real estate investment trusts) should gear up for the fact that the off-mall trend could drive sluggish properties into extinction. In fact, Coresight Research estimates that within the next three to five years, around 25% of U.S. malls will be forced to close down.
This doesn't mean that all malls are doomed. Class A properties are in a stronger position to overcome the events of the pandemic and move forward with healthy revenue streams, especially as more and more consumers do manage to find their way back to malls. But still, mall REIT investors should brace for a rocky transition period in the near term, especially if other retailers opt to adopt a similar approach to Macy's and L Brands.