Indoor Shopping Maul: COVID-19 Seems to Be Expediting Retail Trends

The “cathedrals of consumption” known as your neighborhood shopping centers and malls have lost sacred ground over the last couple years as storied retailers shuttered thousands of stores, or worse yet, got tossed around in bankruptcy proceedings.

What comes out of the rubble that’s been damaged even more by the pandemic remains to be seen. What looks clear, however, is that a massive redo of the American shopping experience is underway. For investors (and shoppers), it might be a time to keep close tabs on the rapidly-evolving retail landscape.

Here’s a quick peek at what’s new. Remember, though, retail fallout from COVID-19 is a work in progress, and the outlook could change at short notice—for better or worse. As an investor, it’s best to proceed with eyes wide open, and perhaps take baby steps, i.e., not go all in at once or get too concentrated in any one investment.

Falling House of Retailers

J.C. Penney (JCP) is the latest legacy department-store retailer to take the plunge into bankruptcy court, following the likes of Sears, Carson Pirie Scott, and others.

And Macy’s (M), reportedly in danger of running out of cash before year end, leaned on its valuable real estate portfolio to secure a $3.15 billion asset-backed loan in early June.

“The high quality of our real estate portfolio positioned us well to execute this offering,” Chief Executive Jeff Gennette, said at the time.

But is this just an exercise in buying time? And who might be next? Market analysts are keeping close eyes on Nordstrom (JWN), Dillard’s (DDS), Kohl’s (KSS) and Gap (GPS), to name a few, according to Gerry Storch, former retail CEO and long-time retail industry expert. He pointed out that each of these firms have tapped credit facilities and used other tactics to keep the lights on during the quarantines and the ongoing pandemic.

If the holiday shopping season turns out to ring up an anemic 1% to 2.6% gain as AlixPartners, the global consulting firm, predicts, Storch sees many mall players—including anchor stores—falling into dire straits.

“These companies had the flexibility to generate cash, to survive the worst part of the pandemic effect and they were able to get financing,” he said. “But the problem is they’ve used up their flexibility.”

The Indoor Blues

There was a time when indoor malls and their vast array of retailers and food options coupled with their climate-controlled backdrops became the go-to hangout, first in suburbia, and, finally, urban settings too.

As online shopping—led by e-commerce giant Amazon (AMZN) grew in popularity and the spending crowds opted for “experiences” rather than purchases, indoor shopping centers and malls started losing their pizzazz.

That all took on another life form as the pandemic, the nearly three-month quarantines tied to it, and the continued fear of being near other potentially COVID-infected folks in large enclosed interiors slammed the brakes on foot traffic into those sites.

Pacer.ai, which tracks shopping behavior and foot traffic, logged a 3% year-over-year gain in foot traffic to shopping centers overall the week of Feb. 24. Four weeks later, that traffic plunged to a negative-87% and stayed there for another four weeks before beginning an unhurried crawl to the upside. As of mid-September 2020, traffic to shopping centers was still at a minus-21%.

Grocery-store foot traffic was flat while that at superstores, mostly big-box stores such as Walmart (WMT), Target (TGT), and discount haven Dollar General (DG) were up 4% during the period. Home improvement stores enjoyed the strongest year-over-year results, up nearly 20%.

Did you notice that all these retailers are typically in open-air shopping centers and strip malls?

Open-air facilities have been gaining in shopping popularity because they allow for more comfortable social distancing outdoors, are anchored by the types of retailers consumers are flocking to now (rather than apparel, accessories or specialty retailers). Plus, they’re typically easier to drive to, park at and enter than many regional shopping centers and malls. And they’re a main component of the rise in lifestyle centers—a manifold mix of uses ranging from multifamily complexes to grocers and nail salons to the corner drug store.

Neil Saunders, managing director of analytics and consulting firm GlobalData, sees yet another reason why open-air malls are more popular now. “Our survey data constantly shows that shoppers are far more nervous about returning to enclosed mall locations than they are to outdoor shopping centers,” he said in a RetailWire post.

“However, this is not just a health issue,” he added, noting that many indoor shopping centers and malls “are very dated and quite a few are basically big concrete boxes devoid of inspiration and natural light.

“That wasn’t cutting it with consumers before this pandemic and interest is now waning faster than ever,” he said. Plus, many outdoor centers are more modern and quite a few are integrated into mixed-use neighborhoods, which helps generate traffic.

Who’s On First?

Once upon a time, shopping center and mall owners just had tenants who were retailers—separate from all other operations—paying rent and helping to keep those consumer gathering spots hubs of activity.

Not so much anymore. In what might be the equivalent of an about-face in the world of retail, Simon Property Group (SPG) has teamed with partners to bail out some of their major tenants. Brookfield Properties (BPY) and BlackRock’s (BLK) Authentic Brands Group, both separately and together, have been part of rescue plans for Aeropostale, Forever 21, Brooks Brothers and Lucky Brand Dungarees.

Now they appear to have their hooks into JCP. Simon and Brookfield reached an $800 million agreement in principle to purchase the retail assets of Penney, a deal that sidestepped a total liquidation of the 118-year-old company and saved an as-yet unknown number of the nearly 850 stores it had before bankruptcy.   

JCP is the second only to M as the largest anchor tenant at shopping centers and malls across the U.S., many of which Simon and Brookfield own. Keeping Penney’s mostly intact also staves off a ripple effect throughout the shopping centers and malls that relied on the traffic.

The long-term plan—and potential exit strategy—is still a mystery. Brookfield is letting some 20% of its workforce go, according to a staff memo CNBC obtained. That looks to be tied mostly to leasing agents, which Brookfield, or any other shopping center owner for that matter, likely needs fewer of amid this overhaul in the industry and the effects of the pandemic.

How the industry shakes out, too, is still ambiguous. Remember, the transition has been going on for the better part of the last half of the decade, Still, there’s one thing for sure: Shopping in the U.S. seems to be in for a big transition. Stay tuned.