Brad Schwer: Our fresh take on U.S. mall REITs incorporates numerous headwinds hitting the industry. We've assigned no-moat ratings for Simon Property Group, Macerich, and GGP, with negative trends to each mall owner based on a diminishing network effect.
If we take a step back, it's no secret that sales are shifting online. E-commerce accounts for about 10% of total retail sales, and that number is growing at a double-digit pace annually. This is definitely a game-changer for the industry, and a problem for mall owners. Many of their tenants are shifting away from the physical store and favoring an online strategy. We've seen some of the most common mall tenants either reduce or freeze store count growth recently. While overall sales may still be healthy, retailers aren't getting as much bang for their buck at the physical locations.
This trend will only amplify going forward, negatively affecting several drivers for mall operators. First, occupancy rates should dip, but not by much. Nothing turns shoppers off like a mall littered with vacancies, so mall operators will do whatever it takes to keep a full house, and that will come at the expense of pricing. Second, leasing spreads should soften. When we look at rent as a percentage of tenant sales per square foot, the ratios are on the rise, telling us that tenants are feeling pressured. You've got a rising numerator in rents but a falling denominator as tenant sales per square foot shift online.
We currently view all three mall operators as overvalued with room to fall, and as we start to trim the fat on the 1,100-plus malls in the U.S., we think the effects will be felt industrywide and should be followed by slower growth and a shift in pricing power to the tenant.