Today’s consumers want more from brick-and-mortar retail. They demand better value for their money and emphasize experiences over transactions. Before the digital age, stores concentrated on basic supply-and-demand. But e-commerce now serves shoppers craving convenience, forcing traditional retail to think differently.
We’ve seen a wave of store closures and retail bankruptcies over the last few years, especially among traditional department stores like Macy’s and J.C. Penney’s. These closures have impacted regional malls, which have historically relied on department stores as flagship anchors. Anchor store closures may result in lower foot traffic in malls. This may drive down store earnings, and may mean lower rent growth for mall REITs.
However, beyond this period of market transition, we are looking at how retail will adapt to consumer demands. Malls are exploring the marriage of indoor and outdoor space. They are welcoming a new tenant mix, which includes expansive entertainment options, as well as fast fashion, and health clubs.
The stores within these malls are also reinventing themselves. They are emphasizing storytelling over selling and creating a platform for long-term customer acquisition. Many retailers are working with landlords on shorter leases, while focusing on brand experiments and pop-up outlets during months with higher foot traffic. Online retail giants, like Amazon with its acquisition of Whole Foods, are also expanding their physical footprints.
Going forward, regional malls still hold core advantages that make them a potentially attractive investment opportunity. They provide easy shopping access to physical storefronts in target markets where demographics are still on their side. This affords them the flexibility to successfully transition to town centers that broaden their appeal.
At Resource, we are monitoring retail opportunities that proactively recognize this shift, and are trading at substantial discounts to net asset value. These pockets of value still have the potential to drive returns for investors in the long term.