Many investors are letting out a sigh of relief as signs point to recovery for commercial real estate (CRE) after the COVID-19 pandemic. Occupancy, rental collections, and rental rates are rising again for many sectors, but signs aren't positive for all real estate investment trusts (REITs). Simon Property Group (NYSE: SPG), the world's largest mall operator, has battled numerous challenges, including retail store closures, which has plummeted the company's share prices and put its future into question. Despite recovery being on the horizon, many signs point to continued trouble for Simon Property Group. Here's why.
Malls aren't recovering like other retailers
Q3 and Q4 of 2020 resulted in a large number of retailers filing bankruptcy and announcing the closure of hundreds of stores. For mall operators like Simon Property Group, this is bad news. Store vacancies can lead to the slow and steady demise of the mall, especially if anchor department stores or retailers close their doors. This is one reason mall operators like Brookfield Property Partners (NYSE: BPY) and Simon Property Group shelled out millions in 2020 to help rescue the drowning companies.
Despite these efforts, clothing stores, food services, and large department stores have experienced the greatest decline in sales year over year and are showing to be the slowest to recover. A recent Moody's report found that mall vacancy jumped to 11.4% -- a 90 basis point increase in a single quarter, a sign that the retail apocalypse is nowhere near over.
Simon's saving grace
Being the largest operator in a dying sector isn't ideal and isn't a great sign for investors. But Simon Property Group does have a few things going for it, the biggest of which is adaptability. Simon realizes that shopping preferences are shifting to online in the long term and is adapting its business model to find new tenants and reuse certain space to maintain or supplement revenues. In 2020, Simon partnered with Amazon (NASDAQ: AMZN) to turn empty mall space into a fulfillment center, and there's a strong chance the company will continue to adapt space to meet increased demand for warehouse and distribution centers.
Simon suffered a nearly $1 billion loss in net operating income in 2020, which has put tremendous pressure on the company to maintain debt and investor obligations. While initial restrictions are loosening, allowing Simon to return to more normal operations, it still has a turbulent road ahead. How far the company will go to save its model and how much adapting space can do for saving the company is still unknown. The company does have a significant amount of cash on hand to keep itself afloat for the foreseeable future, but there are definitely troubling signs ahead.