3 Trends That Investors In Mall REITs Need To Watch And The One That's Already Delivering

Real estate investors interested in retail REITs have seen some positive trends lately. Foot traffic has rebounded since the pandemic. Placer.ai's report, The Comeback of the Mall in 2024, showed that last year’s shopping visits were 2.3% lower than they had been in 2019. This is compared to 10.9% in 2021 and 5.9% in 2022. Another positive report from JLL showed that almost 90% of parents doing back-to-school shopping planned to visit stores in person and spend around 63% of their budgets in-store versus online. The total return for retail REITs, as tracked by Nareit, was up 7.63% as of the end of July. 

While malls are doing well, there are some storm clouds. Retail bankruptcies are rising, and some large chains are starting to reduce their footprint. One to watch is the slow rollout of Macy's store closures, which will substantively shift how malls consider anchor spaces and their overall footprint. 

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Living At The Mall

In its most recent earnings call, Simon Property Group SPG reported starting construction on a luxury residential development in Northgate station, a Seattle mall. The project will have 234 units and amenities for residents. Simon said it will spend $1.5 billion adding hotel rooms and apartment units to its malls in the next five years. Last year, the real estate firm JLL studied 153 mall redevelopments and found that 49% were mixed-use, adding residences, offices, or hotels. 

The positive side for real estate investors is that it gives mall operators another revenue source. That can be useful if retail behavior shifts and we see more high-profile retail bankruptcies. The negative side is that these types of projects can be expensive and time-consuming, and there is no guarantee that investment projections for rent meet reality. 

The Rise Of Medtail

Medtail is a mashup of retail and medical, and it's becoming a big business in many malls. While urgent care centers, chiropractors, dentists, and other medical services have long been popular in strip mall locations, they are also increasingly available in larger malls. Medtail gained traction during the pandemic when landlords were looking for tenants and has gained strength ever since. "Medtail is one of our hottest categories, if not the hottest," Phillips Edison & Co. senior vice president of leasing Ron Meyers told ICSC last year. 

Real estate investors should keep an eye on this trend. It is another way for mall owners to diversify their rental base away from simply being apparel or shopping-based. The downside is that some companies like Walmart that were making inroads into the space decided to shut down their clinics. Urgent care remains a robust business, but this emerging category is subject to some volatility. 

Big Spaces Could Mean Big Experiences

Since the rise of mall culture in the 1980s, the mall has been a place to hang out. That has meant shopping, food, and places like video arcades and gyms. CNBC reported that after the closure of a Macy’s at Tysons Galleria in the Washington, D.C. area, the owner, Brookfield, added a new wing with a bowling alley and movie theater. Near Salt Lake City, another former Macy's will be the new practice facility for Utah's new NHL expansion team. Netflix is testing out mall spaces where people can get up close and personal with their favorite shows. The sky is the limit regarding mall experiences, as proven by the ski resort in the American dream Mall and the roller coaster at the Mall of America. 

New uses do come with new risks, and not all ideas take off. Five years ago, Simon Property Group invested heavily in the esports trend, picturing a future of malls full of eager gamers. That hasn't taken off the way it was envisioned, and similar efforts in virtual reality have also faltered.

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All Malls Didn't Become Distribution Centers

When retail sentiment was low at the heart of the pandemic, it seemed like the mall’s only future was as a distribution center. The rise of buying online and picking up in-store and the increase in delivery services have meant that many malls have some form of distribution component. Amazon turned 25 shopping malls into fulfillment centers between 2016 and 2019, and at one point, it was in talks with Simon Property Group about taking over former JC Penney spaces. 

As foot traffic rebounded after the pandemic, retail space suddenly became desirable again, and owners realized they could earn far more from retail tenants. Amazon is still actively converting former mall sites from Worcester, MA, to Baton Rouge, LA, into warehouse spaces. These former sites are mostly Class B or C malls in areas where much retail traffic had already left. 

Retail is an ever-evolving industry. Retail real estate investors should keep an eye on these and other trends, whether they are investing through REITs or other types of passive real estate investing like single-deal syndications. Next time you head to your local mall, consider it field research. 

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