As COVID-19 restrictions loosen and more Americans are vaccinated, pandemic-fatigued consumers appear eager to leave the house and return to brick-and-mortar retail locations, prompting experts to say that the mall sector is showing signs of stabilization after a prolonged period of uncertainty.
The strongest malls with the healthiest retailers are poised to see increasing occupancies and rents and higher foot traffic as the pandemic subsides, they say.
In an earnings call in May, Simon Property Group, Inc. (NYSE: SPG) chairman, president, and CEO David Simon pointed to “really good” leasing demand across the board, with restaurant demand in particular at a “very high” level. “We generally feel pretty good and much better than we [have] felt in a long time,” he said.
While consumers are returning to malls, Simon cautioned that it is difficult to gauge future demand, so the company remains conservative. It’s unclear if the uptick is a shorter-term boost, as people are excited to get out after a year of isolation, or if it’s viable long term, he noted. Additionally, international tourism hasn’t returned to malls, which Simon expects in 2022.
Although regional malls recorded a record-high 11.4% vacancy rate in the first quarter of 2021, as Moody’s Analytics REIS reports, foot traffic is up significantly. Analytics firm Placer.ai says that foot traffic in a 52-mall sample jumped 86% in March 2021 compared with March 2020, reflecting pent-up demand. Although that’s still 24% lower than March 2019, signs indicate the sector is on the mend.
“We’re seeing signs of stabilization in the sector,” says Richard Hill, head of U.S. REIT equity research and commercial real estate debt research at Morgan Stanley. “We haven’t seen the revenue growth yet, but we’ve certainly seen foot traffic bounce back.”
More importantly, Hill says, there is a lot of pent-up demand to spend. “Personal consumer expenditures are off the charts because you had a lot of money put into the pockets of the consumer.” Hill says the trough faced by the mall sector wasn’t as severe as anticipated, and the bounce-back has been better than expected. “I don’t want to give the impression that it’s puppy dogs and rainbows because it’s not, but the higher-quality cohort is actually holding up pretty well.”
Other analysts also see improvements. Christina Boni, SVP in the corporate finance group at Moody’s Investors Services Inc., notes that as we move further into 2021, “the vaccination rollouts, combined with the stimulus plan, means we’re definitely starting to see significant improvements in the sector.”
REITs Report Gains
Heather Crowell, EVP of strategy and communications at PREIT (NYSE: PEI), notes that traffic flows across the mall REIT’s portfolio continue to climb back to pre-pandemic levels.
In April, PREIT’s comparable properties recorded an 11 percentage point increase in traffic from March, registering 86% of 2019 levels, with half of the portfolio registering 90% or more, Crowell says. PREIT also saw traffic increase 18% on average across the portfolio in the second week of May compared with the first week of the month.
During the first quarter of 2021, portfolio-wide sales at Macerich (NYSE: MAC) properties were 2% higher than the first quarter of 2019, excluding food and beverage, which was still restricted, says Doug Healey, Macerich’s senior executive vice president of leasing.
“We look at our Arizona assets as a bellwether for the rest of the portfolio, as Arizona has had fewer COVID-related restrictions,” Healey explains. In the first quarter in Arizona, excluding food and beverage, sales were 11.5% higher than the first quarter of 2019. Looking only at the month of March, Arizona sales were 18% higher than in March 2019. “This tells us there is tremendous pent-up consumer demand,” Healey says.
PREIT is also seeing sales rise. Based on a comparable set of tenants that reported sales in March 2019 and 2021, sales grew at 14 of the company’s managed properties, notes Crowell. For the first quarter, more than half of PREIT’s properties reported improved sales for comparable tenants.
Lively Leasing
During the first quarter earnings call, Simon noted that leasing momentum continued across its portfolio, while the company reported a “significant” number of leases in its pipeline. The improving domestic economic environment and shopper sentiment have increased foot traffic and sales across the portfolio, Simon said.
The amount of new and renewal leases signed through mid-2021 at Macerich properties is actually outpacing the number of leases signed during the same, pre-COVID period in 2019, Healey says. And 2019, he notes, was a high-volume leasing year.
At the end of the first quarter, Macerich had 102 signed leases for new stores set to open in 2021, totaling 617,000 square feet. It has signed leases for an additional 250,000 square feet, and another 800,000 square feet in lease negotiations—that totals 1.6 million square feet of new space.
Macerich says it is experiencing strong demand across many categories, with shoppers spending more on apparel, accessories, jewelry, and beauty after being confined to home for much of the pandemic.
Macerich signed several new-to-the-company retailers including men’s clothing stores Buck Mason and Psycho Bunny, and activewear retailer OFFLINE by Aerie. It also has two-level Primark stores opening at Tysons Corner Center in Tysons, Virginia, at Green Acres Mall in Valley Stream, New York, and at Fashion District Philadelphia.
Meanwhile, short-term leasing, including temporary inline space and pop-ups, as well as carts and kiosks, are important revenue generators. This helps ensure an “always-exciting mix of concepts and experiences…and enables emerging brands to explore physical retail settings, which often leads to longer-term leases,” Healey says.
PREIT is also seeing a jump in leasing, including apparel retailers. Rose & Remington, a new tenant for PREIT, will open at Woodland Mall in Grand Rapids, Michigan. Windsor Fashions signed five leases across PREIT malls, and Rue 21 signed three new leases.
