In an online world, do malls matter?

Suburban shopping malls are still an important real estate sector, but quality is critical

In an online world, do malls matter?

Rodriguez_Joe_sm_150dpi_RGB Chris Faems

For decades, real estate watchers have periodically claimed that suburban shopping malls are dying. Catalogs and TV shopping channels have been seen as serious threats — yet the mall has remained a suburban staple. Today, as online shopping dominates the market and high-profile department stores experience closures and bankruptcies, we’re hearing this familiar refrain once again. Despite the challenges, Invesco Real Estate believes brick-and-mortar locations will continue to be crucial to retailers — but identifying the properties with the potential to succeed may be more critical than ever.

Retail stores have a history of adapting to change

Throughout US history, there has been intense competition among retail stores to adapt to ever-changing shopper tastes, demographics and preferred living locales. Shopping used to take place primarily in city centers, but after World War II, the new interstate highway system paved the way for urban sprawl and suburban malls. The challenges to this format have been intense: catalog shopping, television shopping, fashion outlet malls, big-box retailers, stand-alone department stores and rising fuel prices among them.

What we have learned from history is that retail properties must always remain flexible and adaptable to changing consumer tastes. Will some malls go dark or be repurposed? Will more mall-focused retailers close locations or declare bankruptcy?  We believe that will definitely be the case. However, we also believe those most at risk are the lower-productivity malls — the so-called “C” malls — whose futures were uncertain even before the growth of e-commerce.

On the other hand, we believe that the best malls — the ones that people enjoy visiting and that are located in high-density, high-income areas — have a better chance to gain new retail tenants or to repurpose their space with restaurants, entertainment centers, residential areas, offices or hotels. Currently, US malls lag the rest of the world in embracing non-fashion retail uses. In other markets around the globe, food, beverage and entertainment can make up more than 50% of a mall’s floor space; the allocation to these categories in US malls is considerably less and, we believe, has room to grow.

Is investor pessimism an overreaction?

The woes of many retail chains have made headlines and grabbed investors’ attention. From a valuation standpoint, US mall real estate investment trusts (REITs) were trading at around a 19% discount to net asset value as of Feb. 28, 2017.1 So has the market overreacted to the headline news?  Adverse news related to sub-par chains may continue to weigh on sentiment. However in our opinion, much of the negative news appears priced into the market.

From a fundamental perspective, regional mall performance has become bifurcated. Select mall REITs and other high-quality regional mall landlords have continued to record high occupancy rates — 96% on average2 — and appear to even welcome the opportunity to replace marginal department stores with more current and more productive uses. Lower-quality mall occupancies remain around 92% on average,3 and these malls may have limited ability to find new tenants.

Stock price performance so far in 2017 reflects this bifurcated quality, with higher-quality mall companies outperforming low-quality companies by 15.1% through March 22, 2017 (with returns of -7.4% versus -22.5%, respectively).4

Invesco Real Estate’s mall outlook

We do not share the view that the mall is dead. Even e-commerce bellwether Amazon has opened physical stores in high-density locations. Retailers simply must adapt to the current environment. That may include concentrating on the best locations and optimizing their mix of online and physical presence — an “omnichannel” approach to retail.

Invesco Real Estate has historically preferred mall REITs that focus on higher-quality malls, and we have avoided those REITs that focus on lower-quality malls in less-dense areas. We have consistently concentrated on mall REITs with quality and productivity, as well as a geographic bias toward high-barrier markets on the East Coast or West Coast, and/or high-income, high-density locations in Middle America. We will continue to compare upper-tier mall valuations against our assessment of underlying real estate fundamentals and adjust positions as warranted.

Learn more about Invesco Global Real Estate Income Fund.

1 Source: Bloomberg, L.P. US mall REITs represented by the FTSE NAREIT Equity Regional Malls Sub Sector Index.

2 Source: Bloomberg, L.P. Represents the constituents of the FTSE NAREIT Equity Regional Malls Sub Sector Index that are defined by GreenStreet Advisors as “high productivity” mall companies. Occupancy stats are the market-cap-weighted average as of fourth quarter 2016.

3 Source: Bloomberg, L.P. Represents the constituents of the FTSE NAREIT Equity Regional Malls Sub Sector Index that are defined by GreenStreet Advisors as “low productivity” mall companies. Occupancy stats are the market-cap-weighted average as of fourth quarter 2016.

4 Source: Bloomberg, L.P. Represents the constituents of the FTSE NAREIT Equity Regional Malls Sub Sector Index that are defined by GreenStreet Advisors as “high productivity” and “low productivity” mall companies.

Important information

Blog header image: IR Stone/

The FTSE NAREIT Equity Regional Malls Sub Sector Index is an unmanaged index used to represent US mall real estate investment trusts.

A real estate company’s net asset value (NAV) is derived by taking the perceived underlying value of its properties and subtracting the debt related to those properties. This amount is then divided by the number of the company’s outstanding shares to determine its NAV.

Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.

Invesco Global Real Estate Income Fund risks

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Joe Rodriguez Jr.

Managing Director

Head of Global Real Estate Securities

Invesco Real Estate

In addition to portfolio management, Mr. Rodriguez is a managing director and the head of real estate securities for Invesco Real Estate, where he oversees all phases of the unit, including securities research and administration.

Mr. Rodriguez began his investment career in 1983 and joined Invesco Real Estate, the Dallas-based investment management affiliate of Invesco Institutional (N.A.), Inc., in 1990. He has served on the editorial board for the Financial Times Stock Exchange National Association of Real Estate Investment Trusts (FTSE NAREIT), as well as the editorial board of the Institutional Real Estate Securities newsletter. He is a member of the National Association of Business Economists, American Real Estate Society and the Institute of Certified Financial Planners. He has also served as adjunct professor of economics at The University of Texas at Dallas.

In addition, Mr. Rodriguez was a contributing author to Real Estate Investment Trusts: Structure Analysis and Strategy, published by McGraw-Hill. He made contributions as editor and author to several industry publications, and has been featured as a real estate expert by both financial industry print and television media such as CNBC and Bloomberg News.

Mr. Rodriguez earned a Bachelor of Business Administration degree in economics and finance as well as an MBA in finance from Baylor University.

Chris Faems, CFA

Associate Portfolio Manager

Chris Faems is an Associate Portfolio Manager with the Real Estate Securities Portfolio Management and Research team with Invesco Real Estate. His current duties include researching fundamental and quantitative information on real estate securities.

Prior to joining Invesco in 2006, Mr. Faems worked at Flagstone Securities as a senior research analyst focusing on equity research and investment recommendations of mortgage finance companies. Previously, he worked at Kennedy Capital Management as a research analyst covering small- and mid-cap financial services companies, and at Stifel, Nicolaus & Co. as an investment banker in the financial institutions group. He entered the industry in 1996.

Mr. Faems earned a BS degree in finance from Washington University in St. Louis. He is a CFA charterholder.