There's a reason department stores work so well in malls: Malls tend to be conveniently located -- often, they're highway-adjacent or part of public transportation routes. The result? Customers can access malls, and the department stores they house, with relative ease.
Of course, this arrangement benefits malls as well. Malls tend to rely on department stores to serve as anchor tenants, taking up multiple floors of space, paying a solid amount of rent, and enticing other tenants and customers to visit.
But these days, a growing number of retailers are taking their business away from malls. Macy's (NYSE: M), for example, is making plans to test out a number of smaller off-mall locations. And The Gap (NYSE: GPS) is making similar plans to ditch malls and move into open-air shopping centers.
Clearly, losing stores is bad news for malls. But the big question is: Will this trend continue? And what does it mean to real estate investors?
The upside of going off-mall
On one hand, having a mall presence can work wonders for retailers. Consumers who come in to shop for other items might easily pop into a department store on their way out and scoop up some impulse buys.
On the other hand, opening up off-mall locations comes with its own set of benefits. For one thing, as convenient as malls may be, stand-alone stores in open-air shopping centers can be even more accessible, especially for consumers with access to a vehicle. And it's often easier to park close to a stand-alone store than navigate a crowded mall parking lot.
Opening off-mall stores could also translate to less competition -- and higher revenue. If Macy's is one of several department stores in a given mall, it has to split its business with its counterparts. But if Macy's is the only department store in a strip mall that also houses a pharmacy, home improvement store, and pet salon, any consumer that heads to that mall for clothing, towels, or cutlery won't be lured to buy those items elsewhere in that mall.
Furthermore, going off-mall allows larger stores like Macy's to try out locations with less square footage, thereby cutting costs. And on a near-term basis, consumers may be more comfortable with the idea of shopping at a store in a strip mall than having to walk through a mall and battle crowds trying to access a specific retailer. Granted, that particular issue is likely to resolve once the coronavirus pandemic comes to an end, but it's yet another motivator for retailers to turn away from malls this year in particular.
The Millionacres bottom line
For all of these reasons, more retailers may seek to abandon malls this year (or at least make plans to do so). If they go that route, those who invest in malls could be in for serious losses. It's bad enough the pandemic has forced numerous stores into permanent closures, thereby creating the beginnings of a mall vacancy crisis. But to lose retailers to nonmall locations could be a devastating blow -- and one mall REIT, or real estate investment trust, holders may need to brace for.