The coronavirus pandemic has caused a lot of retailers to close their doors permanently. That's been a blow to malls and shopping centers, who can't afford to keep losing tenants. But despite the numerous closures over the past year, there's one breed of store that's been thriving during the pandemic -- discount chains.
Discount stores have their moment to shine
At a time when department stores and other retailers are closing their doors, discount chains are looking to expand. HomeGoods, which is part of the TJX Companies (NYSE: TJX); Five Below (NASDAQ: FIVE); and Dollar General (NYSE: DG) have all announced plans to open more stores in 2021.
Dollar stores in particular have done well during the pandemic as consumers have grown more budget-conscious and desperate parents tried to keep their bored, restless kids entertained on the cheap. Dollar General, which is more commonly found in rural markets, added 1,000 stores in 2020 and has plans to open up another 1,051 this year.
Meanwhile, Five Below plans to add another 180 stores in 2021. And Dollar Tree (NASDAQ: DLTR) plans to add 600 stores this year. All these retailers saw an uptick in sales in 2020, which was certainly not the case for retailers across the board.
While discount stores typically don't take up residence in indoor malls, they do have the potential to serve as anchor tenants for shopping centers in the near term due to their size. HomeGoods in particular is often an anchor store, and TJX plans to double the number of stores in the next few years. And at a time when so many larger tenants, including department stores, are shutting down, that's a good thing.
Furthermore, because discount stores don't directly compete with traditional retailers, they're not necessarily a deterrent for other tenants looking to avoid competition in shopping center setups, so that's another big plus.
But while shopping centers may soon see a boom in leasing activity as discount tenants increase their footprint, malls are likely to continue facing challenges in the wake of the retail apocalypse. Not only are many companies shuttering stores to focus on online sales, but they've been increasingly favoring off-mall locations. That, again, is good news for shopping centers, who certainly won't say no to new tenants. But for indoor malls, it's catastrophic.
Coresight Research predicts 25% of U.S. malls could close within the next three to five years. Many of those closures will likely be malls in areas that lack heavy foot traffic and properties that were sluggish before the pandemic began.
The Millionacres bottom line
As such, real estate investors may want to shift their focus from mall REITs (real estate investment trusts) to shopping center REITs in the near term, especially given the number of discount stores that could start popping up as early as this year. At a time when so many retailers are moving away from physical stores to focus on online sales, an uptick in discount stores is a breath of fresh air for shopping centers and a trend likely to benefit them in a very meaningful way.