For shopping malls to thrive, they need customers. But they also need paying tenants, and the more stores that close their doors permanently, the harder it will be for malls to sustain themselves.
Such is a major concern among mall REIT (real estate investment trust) investors right now. In the wake of the coronavirus pandemic, numerous retailers have closed stores or are making plans to shutter underperforming locations. This trend extends to department stores, which are especially tough tenants to lose, since they serve as anchors for malls.
And now, another popular retailer is planning to close stores in the near term -- yet another blow to malls (and their commercial landlords) at a time when they can't afford any more hits.
Bidding adieu to Victoria's Secret
In late February, L Brands (NYSE: LB), the parent company of Victoria's Secret, announced plans to permanently close between 30 and 50 of its lingerie stores in 2021. What makes this news especially brutal is that the company shuttered almost 250 Victoria's Secret stores in 2020.
Victoria's Secret sales have been sluggish for quite some time, but as was the case for many retailers, the pandemic only made things worse. In fact, L Brands tried to sell off Victoria's Secret before the coronavirus outbreak, but that deal ended up falling through. Now, L Brands says it's planning to move ahead with turning Victoria's Secret into a separate company over the next six months. The company will be quietly testing out private equity firms to see if a buyout is in the cards.
Of course, from a shopping mall perspective, losing Victoria's Secret isn't the same thing as losing a major department store. But still, at this point, saying goodbye to any retail tenant is tough. In addition to store closures, malls are also increasingly facing competition from shopping centers as more retailers test out stand-alone stores in open-air locations. And if closures and off-mall expansion both continue, it's apt to leave traditional malls in a very precarious spot.
It's time to get creative
The reality is that many retailers were making plans to close stores even before the pandemic began, but the events of the past year have accelerated that timeline for a number of well-known brands. Malls, in turn, will need to get creative and open themselves up to new tenants if they want to remain viable in light of all these closures.
There are several options malls have been floating in this regard. Converting mall space to medical centers and walk-in clinics is one reasonable direction to look at, and there's also been talk of turning malls into apartments.
One thing malls have going for them is the combination of ample space and convenient locations. But that won't do malls any good in the absence of tenants to occupy that space, and the more stores that make near-term plans to close, the more imperative it will be for malls to adapt or otherwise risk financial ruin.