Not Dead Yet: What Many Investors Get Wrong About the American Mall

Headlines about the death of the American shopping mall have become so common that the phrase “retail apocalypse” has its own Wikipedia page. But this is a death wrongly foretold—and that creates investment opportunities.

It’s true that some malls are dying. Foot traffic is down as more Americans shop online, while shifting demographics have made malls in some parts of the country obsolete.

We estimate that a third of the 1,200 malls that were operating at the start of 2017 will close their doors, with most of the casualties in less affluent areas where population growth isn’t keeping up with other parts of the country.

Many investors have tried to profit from the shopping mall’s expected demise by betting against commercial mortgage-backed securities (CMBS) backed by loans to mall operators. Here’s the problem as we see it: not every mall is destined to close. We think plenty are likely to adapt and survive. And those that do fail won’t all do so at once.

We’ll dig into how investors can take advantage of this in due course. But first, let’s look at what the doomsayers get wrong about malls.

The Sears Fallacy

The trouble started for malls when the department stores that once served as anchors—such as Macy’s and J.C. Penney—started to close. Sears Holdings, which operates the Sears department stores that have anchored countless malls over the last 50 years, has closed more than 2,500 Sears and Kmart stores since 2005, leaving fewer than 1,000 in operation.

Some lower-tier malls won’t survive the loss of their anchor stores. But others are getting creative about replacing them—and it’s not taking as long as many people expected. For instance, the Northwoods Mall in North Charleston, South Carolina, replaced Sears with Burlington Coat Factory and Carrabba’s Italian Grill last year and saw its net operating income improve. Common anchor tenants of the future may be T.J. Maxx, Wegmans or even a car dealership.

Retailers are shifting toward online sales. But many want to retain a physical presence, too—with good reason. Omni-channel retailers—those with brick-and-mortar stores that also sell online—convert about 5% of online shoppers into buyers, according to the International Council of Shopping Centers. But they do better with their in-store shoppers, with a capture rate of about 20% and a basket size that can be as much as seven times that of an online purchase. Those figures can still make a brick-and-mortar store profitable, despite less in-store foot traffic than in previous years. Call it the power of the impulse purchase.