Mall REITs and their tenants are responding to the growth of e-commerce by exploring new distribution systems and offering an experience that cannot be replicated online, according to an analysis of the U.S. mall industry by Green Street Advisors.
Lower-end malls, however, appear increasingly vulnerable to obsolescence in the evolving retail landscape. In fact, Green Street is predicting that about 15 percent of mall stock that hasn’t been able to react to new market trends will close or be repurposed in the next 10 years.
“There’s no doubt that there’s risk to the lower end of the spectrum,” said Green Street analyst D.J. Busch. He stressed, however, that most of the value in the mall sector resides with top-quality centers that will continue to do well going forward.
E-Commerce Poses Main Risk to Mall Sector
According to Green Street’s report, which was published under the firm’s new Real Estate Analytics product line focusing on private commercial real estate markets, the drag effect of e-commerce on brick-and-mortar retailers’ sales growth is likely to stay well above 100 basis points annually, so long as online sales growth continues on its current path.
At the same time, Busch noted, mall owners such as Simon Property Group, Inc. (NYSE: SPG), General Growth Properties, Inc. (NYSE: GGP), Taubman Centers, Inc. (NYSE: TCO) and Macerich (NYSE: MAC) have seen solid fundamentals in the past few years. These companies have “been cognizant of the fact that they need to make sure their mall is evolving as the consumer evolves,” according to Busch.
One way that mall REITs are adapting is by embracing same-day delivery, Busch said. He explained that a number of leading mall owners have signed on with a new start-up company, Deliv Inc., that uses crowdsourced couriers to provide same-day delivery for customers who order online or purchase in the store. The development reflects a new way for mall owners to look at their space.
“The idea of using your stores not only as a showroom or a retail center, but also as a mini distribution center, is somewhat new to the business,” Busch said. “We don’t know how that type of use will evolve, but it’s another example of how owners and retailers are trying to come up with the best way to get their goods to the consumer in any way that they wish.”
During GGP’s latest quarterly earnings call, CEO Sandeep Mathrani said his company has signed on with Deliv, and “initial results look promising.” He noted that successful retailers are implementing an “omni-channel” method of selling their products by complementing their brick-and-mortar locations with “a robust online store, leveraging their physical store network to provide a powerful and efficient distribution source that ultimately leads to higher sales.”
While fourth quarter earnings did show the impact of e-commerce on mall sales growth, higher-end mall REITs are optimistic that there will always be a reason for retailers to have space in the best centers, Busch said. “You need to have a physical location where customers can come and experience and touch and feel and try on the goods,” he said.
Arthur Coppola, chairman and CEO of Macerich, stressed this same point in a recent earnings call. He noted that companies including Microsoft Corp., Sony Corp., Samsung Group, Tesla Motors and other car dealerships have started placing showrooms in malls. This development underscores the “strength of the brick-and-mortar locations,” Coppola said.
More Restaurant, Lifestyle Options Enhancing Mall Experience
In addition to new distribution systems, mall operators are also bringing more restaurants and entertainment options to their centers.
“Whether it’s a movie theater, restaurant, or in some cases grocery stores, you’re trying to make something that can’t be replicated online,” Busch said. “You’re making the mall much more experiential, as opposed to just retail-driven. That’s been an important change, and the demand for space by those new non-traditional mall tenants has been quite good.”
Meanwhile, malls are also benefitting from the lack of new supply, which is acting as a “very powerful tailwind” to keep fundamentals and occupancy levels high, according to Busch.
“We think at current pricing, malls are an attractive investment relative to other property types,” he said. “The long-term net operating income growth stacks up quite well.”