It's all part of the plan.
That's the assurance that executives at major retail REITs gave in recent weeks about the higher levels of uncertainty to be found in their leasing agreements and tenant mixes these days.
With lockdowns a distant memory and consumers spending again, even on new clothes, Simon Property Group, (which now also has a majority stake in Taubman), Tanger Outlets, Macerich and even Washington Prime Group reported increases in various key metrics for Q2. (CBL Properties, also still in bankruptcy, hasn't announced when it will report, a spokesperson said.)
At Simon Property Group, sales returned to pre-pandemic levels in June, when sales were equal to June 2019, 80% higher than June last year and about 5% higher than May, CEO David Simon told analysts early in August. Industry-wide, traffic to malls has returned to pre-pandemic levels too, with visits in July up 0.7% from 2019, according to Placer.ai, although visits to indoor malls were still down a bit (0.1%), compared to the 2.1% jump at outdoor malls. New COVID surges due to the delta variant may be reversing that, however, according to Unacast data cited by Coresight Research that shows footfall declines worsened in June and July on a two-year basis.
But recovery isn't the whole story. New leases, with new and existing tenants, are saddling mall real estate investment trusts — usually associated with dependability and longterm stability — with unpredictability and unknowns.
The new lease strategy
The pandemic, at first glance, spurred much of the trouble. As the disease outbreak and its weeks of lockdowns played havoc with retail traffic and sales, many retailers refused to pay rent, demanded new lease terms or both. Several, as Simon noted in his call with analysts, were able to wriggle out of their obligations through bankruptcy.
The shift away from the mall began before the pandemic, however, though it was sped up by it. And it's lasting: Several retailers, including Gap Inc., Macy's, Nordstrom and Victoria's Secret, continue to boast about their abandonment of malls, accomplished by closing or relocating stores, in some cases hundreds of them.
All of that has fundamentally changed the tenant-landlord relationship, experts say. As a result, malls are ditching longstanding protocols, signing leases with shorter-than-usual terms and agreeing to rents based on a tenant's sales. It's all working out fine, REIT executives said this month as they released their second quarter reports.
"The strategy we adopted in the height of the pandemic is playing out better than we could have expected," Simon said during the call. "We made the right move. We got the renewals done. We accommodated the vast majority of retailers, assuming they were reasonable in their approach. We got the job done. We kept our properties functioning. We bet on the rebound."
Stephen Yalof, CEO of Tanger Outlets, on his call with analysts earlier this month similarly called shortened leases and variable rents a "strategic approach" that the company resorted to when it was unable to "achieve desired rents." In some cases that was a boon because in the second quarter some variable rents, based at least in part on percentages of sales, exceeded previous fixed rents, he said.
Both also said that signing shorter leases should work to their advantage because they could more quickly and easily free themselves of less desirable lease terms or tenants, when and if a steadier recovery in retail occurs.
In the meantime, some rent will fluctuate according to sales performance, and more leases will come and go, but REIT executives indicated that the situation is temporary. Both malls and tenants want to sign longer-term deals, according to Simon.
"There's all sorts of strategic reasons to do short-term leasings," Simon said, including to keep a less desirable store only until a replacement is found, to try out an untested retail concept or when a mall is redeveloped. "But I think that the simple straightforward answer is I don't think that the fundamental nature of our business has changed in terms of long-term leases."
That's not so clear, however, according to Maya Gal, co-founder of Okapi, a firm that works on identifying and mitigating risk in leasing, tenants and other asset management issues. A lot of landlords are used to having leases set in stone for years. The pandemic alone didn't undo that, but did speed a reversal, she said.
"That pace is really changing, the dynamics of leases is becoming so volatile," Gal said by video call, noting that the uncertainty comes not only with renegotiating rent and lease terms, but also in rethinking the mix of tenants.
The new tenant mix
Given all the retailers fleeing the mall, and the failure of anchors to deliver the traffic they once did, malls are looking for a more diverse set of tenants.
Simon said the company is "tickled pink by the demand" and opportunities in mixed-use development. Yalof said that Tanger is "curating a compelling mix of brands and uses, creating a sense of place for experiential outings, connecting with shoppers in more personalized ways and monetizing the non-store elements of our centers." In a phone interview last month, CBL Properties CEO Stephen Lebovitz emphasized the mall REIT's effort to bring in non-retail tenants like hotels, casinos and entertainment.
That may be logical and even necessary, but how well it works out is another unknown. There's little evidence that such replacements are adequate traffic drivers that translate meaningfully to sales, according to Nick Egelanian, president of retail development firm SiteWorks.
Simon in particular has, in its own tenant mix, an increasing number of retailers it actually owns, including J.C. Penney and, via a 50/50 venture with Authentic Brands Group, Forever 21, Aeropostale, Brooks Brothers and Lucky Brand. David Simon demurred when asked if the company will begin to release details about those operations, which he called "companies that were, frankly, roadkill and we saved them."
"The retailers that we bought, if we didn't buy them, they would be gone," he said, noting that tens of thousands of jobs were saved through the J.C. Penney acquisition alone.
Otherwise, he kept the description of the strategy vague and the outlook general. "Forget about the numbers and what it's meant for us financially," he said. "But we're most proud because we basically kept companies alive that otherwise would be dead, buried and liquidated. And what we found out is, you know what, if we just focus on the business, focus on cash flow, focus on the consumer, we could stabilize the business."
"The retailers that we bought, if we didn't buy them, they would be gone. ... Forget about the numbers and what it's meant for us financially."
CEO, Simon Property Group
Simon earlier this month also reiterated that he would like the federal government to relax tax rules around REIT ownership of tenants. In lobbying Congress, he and other proponents of that change have similarly framed it as a way to save retail jobs. REIT investors and investor advocates, however, are not sure that mall REITs should get into the mercurial retail business at all.
Simon's financial picture and scale, especially with its Taubman interest, along with the quality of its shopping centers and tenant mix, will enable it to eventually emerge from the turmoil in the regional mall space, Wells Fargo analysts said earlier this month.
"While SPG is positioned better than peers with access to secured and unsecured debt, we expect near-term pressure on fundamentals as accelerated retailer bankruptcies and closures related to the pandemic weigh," they also warned.
But the pressure may continue longer term as well. Malls were once defined by dependably high traffic, years-long or even decades-long leases and solid anchor tenants, but that's all disappearing. Despite the recovery seen so far this year, the stability that has vanished may not reappear, some observers say. Egelanian maintains that the mall format simply no longer has a purpose.
That applies to not just weaker mall REITs, but also those like Simon widely seen as immune, according to Doug Stephens, author of "Resurrecting Retail: The Future of Business in a Post-Pandemic World."
"It's easy to conclude that more exclusive malls occupying the most premium real estate will fare better than their B or C counterparts," he said in an email, comparing the obsolescence of malls to the plethora of devices and activities replaced by mobile phones. "The more urgent question is what is going to replace the outdated shopping mall format generally? Virtually every aspect of social and commercial utility that the mall used to offer society is now easily achieved through technology. Hence the mall as a social and commercial concept must be completely reimagined, from the design and tenancies right through to the revenue model. It's a little like the old analogy of the frog in a pot of water that doesn't sense it getting hotter and hotter until it's too late."