Nervous about investing in mall reits? Weโ€™ve seen the headlines. We see endless headlines about how companies like Amazon and Shopify are disrupting the retail industry. Yes, this does hold some merit and traditional shopping malls are going through a major transformation to adapt to the changing landscape. As much as a lot of us fear the Amazon effect, Amazon is only part of the problem. Malls today are struggling in large part due to the fact that the new shopper, the millennials, have different shopping habits than the previous generation. I am a millennial and us millennials prefer to spend money on an experience vs material things. Hence, the travel industry has been booming(just ask Booking Holdings). This doesnโ€™t mean traditional retail is dead. This is just another set back and malls will need to adapt to this new trend. In fact, the malls I visit in the urban areas are packed! As for the malls in the suburbs outside major cities, that is not the case. In this article, I will discuss the problems malls are facing beyond online competition.

Oversupply of retail space

One big obstacle malls are facing that can’t be ignored – America has too many shopping malls! In the US, there is 27 square feet of retail space per person. This is quite the contrast when compared to the rest of the developed world. Their neighbors to the north, Canada, come in second with 17 square feet per person.      

The media

It’s a popular story and the media outlets are in the business of grabbing more readers. So of course, they will exaggerate the situation and make it seem much worse than it is. It’s easy to get consumed in this, and let it shape your perspective. YOU can be one of the smart investors and capitalize on this. 

The apparel industry

Online apparel stores have one major disadvantage going up against physical store fronts – returns! Apparel stores have the highest return rate in the retail sector and managing returns baring the cost of inbound AND outbound shipping is a major burden for online retailers. The rate of returns is not equal between online retailers and retailers with physical stores. Online fashion brands experience a REALLY high return rate. Yes, Iโ€™m talking 30-40% high! This is why it is no surprise major online retailers like UNTUCKit are opening up physical stores in malls to complete their omni-channel experience. 

Of course there is a long list of apparel brands in malls that continue to struggle. But itโ€™s my belief that these brands are outdated and have no relevance anymore. Maybe it’s time to make room for the newer, more successful brands that are winning the battle. 

Along with all of this, shopping for clothes involves a more personal experience and clothes are one thing we will never exclusively buy online. For me personally, it’s impossible to blindly purchase a whole outfit without trying it on in stores. Some of us might even try on 4-5 outfits just to walk out with a single pair of pants. For this reason and this reason alone, I will never give up on mall stocks and im buying up quality mall owners with strong conviction. 

The department store

In order for retailers to stay alive, they need to reduce their store size and boost their sales per square foot. Department stores don’t have this option and are the biggest victims of this so called โ€œretail apocalypseโ€. Since most of these anchor tenants arenโ€™t in the business of selling groceries, most of us have no reason to walk into one of these stores. Durable goods can easily be purchased on Amazon and if we are not buying it online, most would rather not walk through a 30,000 sq ft store to buy it. I’m not losing sleep at night over malls losing anchor tenants. In fact, I see it as an opportunity for them to divide up the space and boost the rent per square foot. 

During these troubled times, I’m buying the best of breed. 

Although I think there are great buying opportunities in the retail space, it’s important to note that not all mall reits are created equal. Opinions may differ on which mall REITs are the better names to hold but the only mall stock i’m putting money into is Taubman Centers(TCO). Why? Because they own the best and most productive retail assets in the business. Highest sales PSF, most rent PSF, highest household income within a 15 mile radius. They really fire on all cylinders and buying into TCO in my opinion is the best way to play this turnaround. I’m not buying the other names because I only want to buy the best. Better yet, as the lower quality malls close their doors and disappear for good, TCO will be reaping the benefits. I also own Tanger(SKT) because I’m a huge fan of the outlet malls and SKT is the only pure play you can buy. I donโ€™t consider SKT a mall stock but could be another retail turnaround success story nonetheless.

Conclusion

Let me get straight to the point. Malls are here to stay. The truth is, we just simply have too many of them. As we go through this transition, the week will fall and the strong will survive. Warren buffet famously said โ€œbe greedy when others are fearful and be fearful when others are greedyโ€. Yes, putting this wisdom into practice is easier said than done and now is the perfect time to put that to the test. With all the negative sentiment surrounding the retail sector and the media continuing to push this retail apocalypse story, itโ€™s very easy to follow the herd. Remember, the market doesnโ€™t just give away valuable companies at a deep discount without justification. Sometimes it takes being a contrarian and taking on risks that others canโ€™t stomach in order to get that discount. It’s time to be that contrarian. Bullish on malls and standing tall against the retail apocalypse!