We know malls come and go, and location is everything, but our latest visit to a few malls in the Chicagoland area leave us scratching our heads in a big way. One was eerily empty.
By Brian Nelson, CFA
A small sample set is never one to extrapolate, but our latest checks of malls in the northwest Chicagoland area came up a little surprising. We’re not sounding the alarm bells just yet, but we think some caution is in order for the largest mall REITs, including Tanger Factory (SKT), Macerich (MAC), Simon Property (SPG) and Taubman (TCO).
Something just wasn’t quite right on our latest visit, and we attribute it primarily to failing anchor department stores, namely Carson Pirie Scott (BONTQ), and dominating e-commerce proliferation from the likes of Amazon (AMZN) and eBay (EBAY), but also from companies like Wayfair (W). Frankly, one of the malls that we visited was so empty that strolling through it was rather eerie. There hardly was anybody there.
We removed Realty Income (O) from the High Yield Dividend Newsletter portfolio some time ago but this retail REIT still resides as a dividend growth play in the Dividend Growth Newsletter portfolio, albeit a very small weighting at that. Realty Income is more of a retail REIT than a mall REIT, so we’re not as concerned with the business from our recent channel checks, but the REITs, in general, are now also feeling a bit of pressure from a bounce in interest rates, too, with the 10-year Treasury inching back to 2.6%.
For some, diversified REIT exposure as in the Vanguard VNQ (VNQ) may make the most sense, but Digital Realty Trust (DLR) is also a fascinating play on data center proliferation. We include a couple other REITs in the High Yield Dividend Newsletter portfolio, too, but their exposure falls outside the retail-oriented theme of this piece. Up to this point, we thought the malls wouldn’t approach extinction for decades, but our latest channel checks suggest that Gen Z (those born in the mid-1990s though the 2000s) may be significantly less likely to visit malls than millennials (MILN).
With Facebook’s (FB) Instagram Checkout and competing forms of entertainment for the youngest generation than aspiring to be “mall rats,” as was common for Gen X-ers (born 1960-1979), from Netflix (NFLX) to dating apps to the social trend toward “experiences” rather than gathering material items, malls may have an even more difficult road ahead than previously expected. The mall REITs will fight the good fight, of course, but our latest checks only indicate that secular trends appear to be intensifying against them. Mall vacancy rates are worth watching closely.
No change to simulated newsletter portfolios.
Related: CBL, PEI, SITC, SRG, IYR
REITs – Retail: CONE, COR, DLR, FRT, KIM, MAC, O, REG, RPAI, SKT, SLG, SPG, SRC, TCO, WPC
Retail – Multiline: DDS, JCP, JWN, KSS, M
Retail – Apparel (Teen-30yrs, Off-Price, Outdoor): AEO, ANF, BKE, COLM, GES, GPS, ROST, TJX, URBN
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.