Should we own Shopping Malls?

The “Smart Money in Real Estate” post discusses Brookfield Property Partners (BPY) and their core retail segment. Prospective BPY owners might ask, should we own shopping malls with Macy’s, Sears and other retailers announcing brick and mortar store closures? It’s a fair question because BPY owns 34% of General Growth Properties (GGP), a S&P 500 retail real estate company. GGP owns, manages, leases, and redevelop class A shopping malls throughout the United States.

Retail is dynamic and very competitive

The retail industry has always been dynamic and very competitive. Do you remember Woolworth’s, Marshall Field’s, Blockbuster Video and, Border’s Books? They were all once household names but are no longer. Many of the big box stores predominant today for example, didn’t exist before the 1990s, they replaced somebody.

The newer malls are beating the older malls

Wells Fargo Securities wrote recently studied 1,000 malls in its data base and found that the older malls struggled to compete with newer malls. The new malls offered modern features and a broader selection of stores. They are located to benefit from shifts in population, demographic and, transportation.

 Wells Fargo reports, “Every situation is different but in general we found that competition was the most common cause of death. On average these “dead malls” were built in mid-1970s and were later surpassed by a larger, more modern property built in the late-1970s to early-1990s.”

BPY’s Core Retail Shopping Malls

“Malls view themselves as community hubs, and as market shifts occur, mall owners throughout the industry have effectively curated new customer offerings to meet changing consumer behaviors and expectations,” said Tom McGee, president and chief executive officer at the International Council of Shopping Centers.

Situs RERC a national firm providing real estate advisory services reports; “Class B and C malls may be closing, but the market is merely rightsizing to adjust to the new realities of the sector. Class A malls are not going anywhere – think Mall of America – because they have adapted to changing consumer preferences, becoming entertainment meccas.”

Impact of online shopping on brick and mortar retail

E-commerce sales as a percent of total retail sales in the U.S. has increased from less than 1% to about 8 percent over the last seventeen years.

Wikipedia lists hundreds of retail chains either liquidated or consolidated over the years. Most retailers on the list disappeared before the online retailers appeared. It’s always been a tough business.

This also means 92-93% of total retail sales remain brick and mortar.

Online companies like Amazon are disruptors and taking business from both from malls and, brick and mortar stores. Blockbuster Video and Borders are examples of two that were forced to close.

Big box retailers like Walmart and Target disrupted retail icons Sears and JC Penny long before Amazon became prevalent. Sears’ and JC Penney’s market values dropped 96% and 86% respectively over a 10 year period.

Valid premise but a false conclusion

What we buy and how we buy it, continuously changes. And, the premise that more consumers are moving to online retailers is supported by the data. The online retail’s rate of growth caught many by surprise. But, after almost twenty years of online sales, the “surprise” is over.

Brick and mortar retailers are now adapting to the online competitive threat. Traditional retailers are reinvesting in their own online capability to prevent further losses and to recapture sales lost to online retailers. Stronger online companies, like Amazon, are building stores to better compete with the brick and mortar retailers.

It seems there will be a place for both physical stores and online retail. I don’t see a winner takes all conclusion after almost two decades of competition.

The Wall Street Journal citing the Wells Fargo study in “Failed Malls Are Mostly Victims of Other Malls, Not Web” writes; “…That is resulting in a more dramatic separation of the strongest and weakest malls, with top-tier malls in cities with strong population and income growth receiving more investment and weaker malls suffering from neglect.”

General Growth Properties is doing fine

At GGP’s class A malls, there are many examples of their adaptation to fill the voids created if an anchor department stores leaves a mall. And, its working. Excluding department stores, GGP outpaced U.S. Retail growth over the 2010 to 2015 period 23% compared to 13% with the class A malls driving most growth.

Mall occupancy has stayed consistently in the 95% range for several years and Millennials are shopping in malls more than any other generation boding well for the future.

GGP has redeveloped 82 vacant department stores since 2011 for a total cost of $1.4 billion, while generating an 11% annual return according to the company. GGP’s 2016 Investor Presentation presents good evidence the Malls will be here for many more years.

The graph below shows the key metric; tenant sales dollars per square foot (SPSF), is rising over all GGP centers. Major class A mall competitor, Simon Properties, is seeing similar success with rising SPSF.

GGP Portfolio Productivity

GGP appears to be adapting well to the ever-changing retail environment.

Conclusion

Internet retailing is capturing some mall revenue. But, competition from newer shopping centers was the most common cause of death for malls over the past decade according to Wells Fargo’s study of 72 such properties.

Some Class B and C malls are closing as they adjust to the new realities of the sector. All class B and C malls are not all created equal and some are doing well.

Class A malls are in best position to adapt to changing consumer preferences. They are located to benefit from shifts in population, demography and, transportation. The stores and malls that are adapting are not only winning they are thriving.

Should BPY investors be concerned over the changes in the retail industry and General Growth Properties? Not in my opinion, GGP owns premier class A malls and, it remains a dynamic and competitive business:

  • Millennials visit regional malls morethan any generation on a regular basis
  • These are irreplaceable retail properties in the U.S.
  • GGP owns 100 of the top 500 malls in the U.S.
  • Traffic in the GGP portfolio is steady with year over year increases across all assets

According to Ken Riggs, President of Situs RERC. “The shedding of stores in the retail space is merely a natural-selection process to make way for the new generation of retail innovators. Just like the TV show ‘Survivor,’ it is about who can outwit, outplay and outlast.”

Bruce Flatt, CEO of Brookfield Asset Management explained the GGP investment to shareholders: “In essence, we subscribe to the Berkshire Hathaway view of investing: If a business is a quality business that has an irreplaceable franchise, then one should continue to hold the investment, as compounding at significant rates of return on your capital over a long time can make shareholders very wealthy…”

Brookfield Property Partners  provide retail investors a way to participate in commercial real estate alongside institutional investors under some of the best asset managers available.

Brookfield Property Partners Website

Long BPY

The Fine Print

Do your own independent research, i.e., due diligence, on any ideas discussed at Value by George. Value by George does not recommend buying or selling any particular security. Only opinions are expressed. Consult a professional for personal advice in order to meet your specialized needs. This communication does not provide complete information regarding its subject matter, and no investor should take any investment action based on this information.

Speak Your Mind

*