Malls were a dirty word in commercial real estate. Now retail is a bright spot.

By Joy Wiltermuth

Foot traffic at top shopping centers is coming back, but 'dying malls' are still a problem

Surprise! Malls are back.

Foot traffic at U.S. shopping centers has been staging a comeback since the darkest days of the pandemic, with visits last year only 2.3% below 2019 levels, according to Placer.ai, a data platform focused on commercial real estate.

Open-air centers have seen the biggest rebound in foot traffic since the pandemic hit four years ago, followed by the broader shopping-center industry, indoor malls and outlets. There also is hope that easing interest rates and slowing inflation in 2024 will bolster the trend further.

Placer.ai studied more than 3,000 shopping centers across the U.S. for its latest report - looking not only at foot-traffic data, but also what amenities and trends appear to be driving customers back.

Gyms, pop-ups, new restaurants and entertainment offerings like laser tag, Ferris wheels and aquariums can all help malls, the report found.

Luxury retailers - including Alexander McQueen, Dior and Hermès - have also been a bright spot as major drivers of mall-leasing activity, accounting for 38% of new high-end store openings in 2022, according to Jones Lang LaSalle (JLL) researchers.

"The high-quality and market-dominant malls are in good shape, but the rest is still working its way through the rationalization process," said Rich Hill, head of real-estate strategy and research at Cohen & Steers.

A parallel process has begun playing out in the beleaguered office sector since 2020, with a string of older buildings selling for 50% discounts or more after the pandemic gave way to remote work and higher borrowing costs for landlords.

Federal Reserve Chair Jerome Powell reiterated on Friday that he thinks the fallout from commercial real estate for bank lenders will take years to work through the system.

But overall, retail "is in a very good spot," Hill said - especially for open-air shopping centers that have benefited from strong foot traffic, little to no new supply built in the past 15 years, and a realization by retailers that local malls can serve as "micro" fulfillment centers by keeping inventory closer to consumers.

Malls became a dirty word in U.S. commercial real estate over a decade ago as more borrowers surrendered weak properties to lenders and delinquencies rose, spurred in part by the rise of online shopping and increased demand for top-quality properties over downtrodden locations.

Several high-profile battles have even erupted on Wall Street over bets on supposedly dying malls.

Over the past decade, lenders and investors have figured out what kind of retail they want exposure to over the long run, with financing flowing to those properties.

Shares of mall-focused real-estate investment trusts Simon Property Group Inc. (SPG) and Macerich Co. (MAC) are up 9.7% and 11.7%, respectively, this year through Thursday, while the S&P 500 index SPX is 10.2% higher over that span, according to FactSet data.

Cohen & Steers' Hill pointed out that malls aren't the only game in town for retail, especially since they make up less than 1,200 out of an estimated 116,000 U.S. shopping centers.

Positive forces in retail have helped drive overall delinquency rates down to near-historic lows, according to CoStar data, even though the rate of past-due mall loans has been stuck near 9% - near the highest level in 15 years.

"We still have too many of them because it takes a long time for malls to 'die,'" Hill said.

-Joy Wiltermuth

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03-30-24 0800ET

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