Retail analyst Jan Kniffen recently declared on CNBC that the death of malls had begun (only six decades after the first fully enclosed, climate-controlled mall was opened in 1956 in Edina, Minnesota.)
Almost 40% of America's malls are predicted to disappear over the next decade, says Kniffen, as consumers go online to do their shopping.
Digital sales could represent half of all retail revenue by then, with Amazon.com, Inc. ( AMZN ) the clear winner from this shift in purchasing while brick-and-mortar retailers struggle to keep up.
So, retailers operating in these disappearing malls clearly lose. The other big loser in this death march are the owners of the malls themselves. Why? Because unless there's an unbelievably strong redevelopment demand for the property the mall sits on, the value of said mall will theoretically crater without the rent generated from retailers.
If you believe Kniffen, and I tend to agree with his assessment, only about 250 malls will do well in America's future retail landscape. About 400 of the 1,100 malls in the U.S. will disappear while the remaining 450 malls will struggle.
Now, let's consider the losers.
The Wall Street Journal recently discussed how retailers such as Restoration Hardware Holdings Inc ( RH ) are moving their stores from several malls dotted across a major city to a single, larger store, in upscale shopping centers or architecturally prominent buildings. My wife recently came back from visiting its Gallery at the Three Arts Club on North Dearborn Street in Chicago; awestruck by the beautiful transformation , she wants to take me to Chicago just to see it for myself.
Class B or C retail malls don't provide this kind of shopping experience. Never have, never will. Class A malls, those locations with sales per square foot in excess of $500, are the ones benefitting from this move to experiential retail. According to Green Street Advisors, a California-based real estate consultant, 44% of the total value of U.S. malls can be found in just 100 properties. That means approximately 900 account for the remaining 56%.
In other words, you don't want to be owning Class B or Class C malls if you can help it. Macy's, Inc. ( M ) closed 40 stores in 2015; Green Street says most were in Class B or Class C malls.
One operator to avoid is CBL & Associates Properties, Inc. ( CBL ) who owns or manages more than 140 properties in the U.S., many of them Class B or C. It generates $374 per square foot from its tenants, less than half Taubman Center's $800 per square foot. As the death of malls plays out, CBL stock is not going to be nearly as attractive as TCO.
In January, Macy's announced that it was closing another 36 stores on top of the ones it closed in 2015. Any mall losing an anchor, even a struggling one, is a serious blow to its revenue. Unfortunately, most of the stores closed are in malls owned by smaller, private operators or are potential candidates to be sold by Taubman and others.
Three other REITs specialize in Class B and Class C malls and should be avoided.
WP Glimcher Inc ( WPG ) is a combination of Washington Prime, the discarded spinoff from Simon and Glimcher Realty, who came together in a $2 billion marriage back in 2014; Pennsylvania R.E.I.T. ( PEI ) who recently sold off 13 malls to focus on its properties averaging $458 per square feet; and Rouse Properties Inc ( RSE ), spun off from GGP in 2012.
However, there's a caveat to that last one: Rouse has agreed to be acquired by Brookfield Asset Management Inc ( BAM ) for $2.8 billion including debt. BAM is one of the best asset managers in the world. If anyone can turn around Rouse's assets, it would be Brookfield's CEO, Bruce Flatt.
Otherwise, the death of the American shopping mall should have investors double-checking their retailer and REIT portfolios.
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