Mall stocks outperformed in 2021 — are they in for another super cycle?

2021 saw 30+ retail bankruptcies and 9,500+ store closures — sending mall operators into panic. But those that focused on the core of real estate — location, location, location — survived, giving investors big returns.

Mall operators with the best L’s survive

Mall property values fell by a third over the past 4 years and three of the largest mall landlords filed for bankruptcies last year.

Two leading mall operators holding some of the highest quality properties, include Simon Property Group (NYSE:SPG) and Macerich (NYSE:MAC) — up 82% and 59% this year. It’s been an eventful decade for both stocks:

• Mall rebound: 2009-2016 — After the 2008 financial crisis, mall stocks went on a 6-year run — with MAC soaring 1,350% and SPG up 600%.
• Death of malls: 2016-2020 — Malls stocks fell over 80% — driven by bankruptcies of large tenants.

After every downturn, SPG and MAC sold off their lowest quality locations — even diversifying by acquiring retailers (i.e. SPG buying J.C. Penny out of bankruptcy in 2020).

Finding tenants in unlikely places…

Mall operators are doing whatever they can to increase mall traffic — innovating their portfolio:

• MAC launched QuikSpace — a digital platform to offer short-term leasing.
• SPG partnered with fintech Klarna — offering buy now pay later payments to mall retailers.

The same e-commerce companies disrupting mall operators’ business models are now helping out. With online customer acquisition costs rising, digital-first brands (i.e. Warby Parker, Away, Allbirds) are launching hundreds of retail stores in recent years — with more coming.

But don’t expect these brands to make up for the mass closures any time soon. Unlike old retailers, online brands are more selective — opting for smaller or showroom-only stores — and only in the best locations.

Investors: Another mall super cycle?

Earnings and mall traffic are giving investors reasons to be optimistic about mall operators:

• Strong earnings reports surpassed their 2019 pre-COVID levels.
• Mall traffic and sales surpassed 2019 levels in certain parts of the US.

Omicron sent mall stocks down in recent weeks — which Morgan Stanley sees as a chance to “buy the dip”. But fear of the e-commerce wave still looms over mall operators — it still being too soon to call off the death of malls.