Two more years of underperformance for malls - Capital Economics
US Commercial Property

Two more years of underperformance for malls

US Commercial Property Update
Written by Kiran Raichura
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Permanent increases in certain types of online sales will mean that regional and super-regional malls underperform the other retail sub-sectors for at least the next two years. Our forecasts point to another 12%-14% of capital value falls in 2021-22 for regional malls.

  • Permanent increases in certain types of online sales will mean that regional and super-regional malls underperform the other retail sub-sectors for at least the next two years. Our forecasts point to another 12%-14% of capital value falls in 2021-22 for regional malls.
  • Despite the 5.3% m/m bounce in retail sales in January, the recovery in the worst-hit sectors still has some way to go, with overall retail spending in restaurants and clothing stores well below levels seen a year ago. (See here and Chart 1.) Those store types tend to be over-represented in regional malls which is why, in April last year, we said that they would fare particularly poorly as a result. (See here.)
  • The view that regional malls would fare poorly has proven correct – while total returns for neighbourhood and community centres last year were minus 4%, regional and super-regional malls posted total returns of minus 14.5%. That underperformance continued the trend seen in the last few years. (See here.) Indeed, as far back as 2018, there were reports suggesting that 10%-30% of the country’s existing 1,200 regional and super-regional malls could close in the following five years.
  • We think the underperformance of regional malls will continue for at least 2021-22, largely due to our expectations of which retail types will see the leakage to online sales persist, even as the pandemic eases. In Q4 2020, US Census data showed that 14% of clothing and general merchandise store sales were made online, up from 10.6% in Q4 2019. Even if that figure were to fall back a little in the short-term, the impact of that change on major anchor tenants, such as clothing and accessories retailers and department stores, is likely to lead to further bankruptcies this year.
  • The problem for landlords is that when an anchor tenant leaves, other retailers have the right to re-negotiate or break their leases. The departure of such a tenant can therefore spell the beginning of the end for malls. And while the idea of an anchorless mall has been mooted, this wouldn’t impress prospective lenders, making it a difficult proposition for most investors, even if they believed it to be a good idea.
  • Ultimately mall owners will need to find a way to attract anchors that can drive footfall to their assets. To that end, an early 2021 survey of 2,500 consumers by WD Partners, an architecture and engineering firm, found that a farmer’s market would most influence Americans to visit a mall. (See Chart 2.) Grocery stores, food halls and green space were also scored as either a 6 or 7 (on a scale of 1-7) by more than 50% of respondents. WD Partners state that, based on previous similar survey findings, shares of over 50% are likely to work. Perhaps some form of grocery anchor could help drive mall visits.
  • But, even with some creative adaptation to consumer demands, many malls will struggle. We expect prices to fall by another 12%-14% over 2021-22, reflecting substantial underperformance compared to neighbourhood and community centres, where we think values are likely to drop by 3%-5%.

Chart 1: US Retail Sales January 2021
(% y/y)

Chart 2: Factors that would Most Influence Mall Visits (% of “Top Two” Responses*)

Source: Refinitiv

Source: WD Partners. *“Top two” responses are scores of 6 or 7 (out of 7)


Kiran Raichura, Senior Property Economist, kiran.raichura@capitaleconomics.com