The coronavirus pandemic has done a number on malls, and several major operators have filed for bankruptcy in its wake. CBL & Associates (NYSE: CBL) and Pennsylvania Real Estate Investment Trust (NYSE: PEI) both filed for Chapter 11 in late 2020. And now, another mall operator has joined their ranks.
Washington Prime needs a bailout
Washington Prime Group (NYSE: WPG), an Ohio-based mall operator with more than 100 locations across the U.S., has filed for Chapter 11 bankruptcy, citing challenges related to the pandemic. Washington Prime was able to secure $100 million in new funding to continue operating in the near term. From there, it hopes to restructure and emerge from bankruptcy on more solid financial footing.
The coronavirus pandemic battered malls in a number of ways. First, it forced nonessential retailers to close early in the outbreak, leading to massive revenue declines. And in the absence of revenue, many retailers fell behind on their rent. In fact, Washington Prime's rental income fell roughly $127 million from 2019 to 2020.
Not only that, but a large number of retailers wound up shuttering stores permanently, leaving malls with massive vacancies to grapple with. Malls had already been losing tenants before the pandemic began, but the events of 2020 made things exponentially worse.
But it's not just store closures hurting malls. Shifting consumer shopping habits are causing their own share of damage. During the pandemic, many consumers moved to online shopping to avoid the risks of entering a mall. In fact, last year, a survey found that 32% of consumers were afraid to shop at malls, though that was well before coronavirus vaccines came into the mix.
Now, it's an unquestionably safer prospect to enter a mall -- at least among the fully vaccinated. But habits can be hard to break, and now that consumers see how easy and convenient it is to order goods online, they may not be rushing to return to malls anytime soon.
Another trend that really took off during the pandemic is BOPIS -- buy online, pick up in store. But malls don't lend as easily to this setup as shopping centers with stand-alone stores, so consumers may, in the near term, favor the latter.
What's next for Washington Prime?
Washington Prime is loaded with debt -- nearly $3.5 billion, to be specific -- and it's been on the edge of bankruptcy since missing a $23 million interest payment back in March. By reorganizing under Chapter 11, the company can, ideally, convert some of its debt into equity and extend its loan terms. But whether Washington Prime is ultimately able to thrive post-bankruptcy will hinge largely on factors outside its control -- namely, the extent to which consumers decide to start frequenting malls again, and the extent to which paying tenants agree to stay put.
All told, Washington Prime's bankruptcy filing may have mall REIT (real estate investment trust) investors feeling anxious, and understandably so. The good news is that as the public increasingly gets vaccinated, health-related concerns should stop being a barrier to entering malls. But whether that's enough to make mall REITs a profitable real estate investment going forward is yet to be determined.