[REN #892] Post Covid-19: 50% of Malls Could Close

Post Covid-19: 50% of Malls Could Close, Real Estate News for Investors Podcast Episode #892

Many U.S. malls are at risk of closing for good because of the pandemic. A new analysis by Green Street Advisors is predicting that coronavirus shutdowns will push department stores into bankruptcy, and force more than half of all U.S. malls to close by the end of the year. If you are a homebuyer or investor, you should check on the status of a nearby mall to see if it might affect your property value.

Green Street says there are 1,000 malls still operating in the U.S. and about 60% of them are anchored by department stores. (1) Department stores like JCPenney, Macy’s, Nordstrom and Neiman Marcus were dealing with a sales slump before COVID-19 forced them to close temporarily. With the cost of the shutdown adding to an already shaky balance sheet, Green Street says it’s inevitable that we’ll see more store closures. And when they go out of business, malls that house them will be at risk.

Malls Face the Loss of Department Stores

We’ve seen malls struggle for the past several years, although many have been reinventing themselves with more entertainment and dining options. But that won’t save them from major department store failures. Green Street analyst Vince Tibone says that until now, “it’s been years of kicking the can down the road.” He says, “Many malls will now be faced with multiple anchor vacancies, a tough place to come back from, especially in an environment where demand for space is virtually non-existent.”

The Dallas-based JC Penney has more than 850 stores and accounts for about 19% of mall anchor space. It announced a few weeks ago that it had missed a $12 million interest payment. That sets off a 30-day grace period before the missed payment turns into an official default. JCPenney said it will use the time to figure out what it will do next — which probably means a bankruptcy filing or an out-of-court debt restructuring.

So it may not be “game over” yet for JCPenney, or for other struggling retailers, but Green Street is predicting that many department stores will fail in the months ahead. As they miss rent payments or close up shop, mall landlords will suffer. They may work hard to fill empty mall space, but it’s not easy to repurpose a former department store.

A recent article in The Atlantic says, “The year 2020 may bring the death of the department store.” (2) U.S. malls were overbuilt in the first place, and that’s part of the problem. Too many retail stores were competing with a rise in online shopping. And now, they may have an even tougher job attracting customers who became online shoppers during the shutdown.

Major Chain Store Closing in 2020

Business Insider compiled a list of at least 3,000 major chain stores that are expected to close this year. (3) That has been the trend in recent years with many new stores opening, as well. But real estate firm Cushman & Wakefield expects a much greater number of closures this year. It had estimated last year, before the coronavirus hit, that as many as 12,000 major chain stores would close this year. The list of 3,000 stores are the ones that have been confirmed. Tibone says, “The only certainty is that there will be far fewer department stores in the future and malls will need to adapt.”

Coronavirus Wild Card

The big wild card right now is how the coronavirus will impact the ability of stores and malls to do business when they reopen. The nation’s biggest mall owner, Simon Property Group, is planning to open 49 shopping centers on Friday, May 1st, in states that have begun to open their economies.

The company has a plan to promote social distancing that includes messages on signs to remain six feet apart and wash hands frequently. Hand sanitizer will be available along with face masks and free temperature checks. Food court seating will be farther apart and bathrooms will allow the use of alternate sinks and urinals. Play areas and drinking fountains will be shut down. Employees will be required to take their temperature before work and wear face masks. Hours will also be limited to Monday through Friday. It’s unclear yet whether customers will feel safe enough to return.

It isn’t just department stores at risk of closure. The National Bureau of Economic Research conducted a small business survey. Several thousand participated and just 30% thought they would survive a shutdown that lasts four months. We are currently around the three month mark, with some states reopening, and others continuing to hunker down.

So hopefully those PPP loans get to the small businesses soon.

And even more importantly, I hope we find a cure soon. There’s never been a time when so many brilliant minds across the globe have come together to fight a common enemy, armed with the most powerful technology ever available to mankind. I’m optimistic.

Links:

(1) Green Street Advisors Analysis

(2) The Atlantic Article

(3) Business Insider Article

(4) Derek Thompson Twitter

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