From the FT:
Blackstone, the world’s largest real estate investor, has warned that the outlook for America’s enclosed shopping malls is darkening quicker than experts expected as the growing online retail threat hammers their valuations.
More than 10 per cent of US retail sales are transacted online, according to Credit Suisse, forcing big chains to shutter thousands of stores in recent years. Retailers have announced plans to close 76m square feet of store space already this year, according to CoStar, a data provider, almost as much as that announced in the whole of 2016.
The math also dictates that 90% of sales happen in physical locations.
Retail woes are intensifying pressures on shopping malls, especially of the lower-end “enclosed” type in smaller American cities and towns, where tenants are moving out or demanding lower rents. The enclosed mall is the classic indoor commercial hub that emerged in the 1950s, rather than the malls built around an anchor grocery chain or department store.
I still call those grocery anchored shopping centers and they have different characteristics. Those malls with department store anchors have been squarely in the sights of investors - the "lower end" enclosed type without anchor tenants are not typically found in REITs.
“The retail industry is clearly facing headwinds. And it’s the first time we’ve seen secular rather than cyclical headwinds,” said Nadeem Meghji, head of North American real estate at Blackstone. “We’re now seeing pressures even on luxury retailers, which I didn’t expect to happen as fast as it has.”
“The internet has made the value proposition for a lot of shopping malls less relevant,” Mr Meghji said. “If you add in the factor that they actually tend to have higher operating costs due to security, electricity and so on, then they are high-cost rental spaces for retailers.”
However, unlike the internet, the additional purchases and the ability to try things on, easily return things... is a value proposition. The internet ever ask you if you want a store card? A belt to go with that?
The private equity firm’s $102bn real estate arm still owns some grocery shop-anchored malls in high-density population areas, but no longer has any exposure to the enclosed shopping mall sector.
Except the malls they have been buying in Japan and India (posted it here) - which also have eCommerce, BTW.
Do I agree that there is a secular change? Yes. Do I believe that it cannot be overcome and/or adapted to? Absolutely not. Yes, there will be pain, but pain does not always lead to death.
Disclosure: I am/we are long CBL, PEI, WPG, SKT.