Is America over-malled?
That question has been posed by more than one financial pundit recently. And judging by a slew of headlines, the answer appears to have already been settled.
“Malls are Doomed” — CNN
“America’s Malls are Dying Off” — Time
“The Death of the American Mall” — The Guardian
“Shopping Malls are Going Extinct” — Business Insider
There is plenty of evidence to support that argument. With anchor tenants like Sears, Macy’s and JC Penney shuttering stores across the country, the number of malls has decreased by a third.
Others are hanging by a thread, likely to be boarded up within the next year or two.
Still, I would have to disagree with the notion that shopping malls are headed for mass extinction.
Yes, there were too many in the herd, and weaker properties have been killed off — survival of the fittest.
But hundreds that remain are doing just fine, particularly those with high-end retailers drawing from affluent neighborhoods.
Admittedly, though, I am a bit biased. As a child of the 1980s, I grew up in my local mall, interacting with other teenagers, snacking in the food court, and losing a pocketful of quarters in the video game arcade. Sadly, my childhood mall was among the 500 to have closed down. But the cavernous structure was bought by a church a few years ago and renovated. The former Dillard’s is now a sanctuary, and even the cinema has been reopened to show family-friendly movies.
This re-purposing of failed malls has become a national trend. Aside from churches, other vacant malls have been turned into offices, medical clinics, even libraries. But from a retail perspective, these structures have simply outlived their usefulness. That’s why there hasn’t been a single new enclosed mall built in over a decade.
I could talk about demographics and store traffic and falling occupancy rates. But we all know the cause: the rise of e-commerce.
You see, I bring all this up not to talk about the demise of malls — but rather the ascendance of online shopping titans like Amazon.com (Nasdaq: AMZN). In an average day, the company rakes in a staggering $400 million in sales. That’s a lot of sporting goods and power tools and electronic devices.
But products purchased on the firm’s website don’t just magically appear at our doorsteps. Most spend some time in a warehouse before they are delivered. And given the boom in online shopping, demand for this space is headed nowhere but up.
The owners of these properties are quietly making a killing. Brick and mortar’s loss is their gain — yours too if you invest in the right place.
The Most Disruptive Force To Emerge In Retail In Several Decades
Morningstar calls it “the most disruptive force to emerge in retail in several decades.” It’s hard to argue with that assessment of Amazon’s business model, which has forever changed the way millions of Americans shop.
Just ask Toys ‘R’ Us, which fell victim like so many others and filed for Chapter 11 bankruptcy recently.
I won’t bore you with a bunch of facts and figures. We all know that most people have migrated online for at least some of their shopping — and they are making more frequent purchases. In fact, the number of online transactions surged by 115 million last year. That helped propel U.S. e-commerce sales to a 16% growth rate, versus a tepid 2.9% for retail overall.
It wasn’t that long ago (2006) when annual e-commerce sales in the U.S. topped $100 billion for the first time. Today, we are rapidly closing in on $500 billion. And within the next decade, analysts are forecasting that Amazon by itself could generate $1 trillion in yearly sales.
That’s truly a market growing by leaps and bounds, except the leaps aren’t measured by the millions — or even the billions — but the hundreds of billions.
Amazon is leading the charge. But it certainly isn’t the only virtual storefront where consumers like to browse. Competitors like Overstock (Nasdaq: OSTK) ring up thousands of digital transactions each day, while Home Depot (NYSE: HD), Wal-Mart (NYSE: WMT) and countless other brick-and-mortar retailers are also channeling a growing portion of revenues through their websites.
If you can’t beat ’em, join ’em.
To attach a number to this trend, look no further than PayPal (Nasdaq: PYPL), whose popular payment platform helps facilitate the electronic movement of cash. Last quarter, the company processed $106.4 billion in digital payment volume, versus $86.2 billion a year ago — a healthy 24% increase.
But to me, this is the clincher. Last week, UPS (NYSE: UPS) announced plans to hire 95,000 seasonal workers just to help out during the upcoming holidays. That’s how many extra employees will be needed to accommodate the surge in package delivery, which reaches 30 million per day (over a million per hour) during peak times in November and December.
That brings me back to my earlier statement about warehouses.
Want To Get Paid For Amazon’s Warehouse Demand?
To meet all those overnight and two-day delivery requests, online retailers have to keep ample merchandise on hand at all times. Demand is particularly strong for so-called “last-mile” warehouses. As the name implies, these are smaller facilities (relative to bulk distribution hubs) located near major population centers, thus allowing for speedy delivery to homes and stores.
As you can see from the chart below, Amazon’s warehouse needs have been expanding at a 35% annual growth rate — doubling every two years on average. The company’s storage space has pushed through the 100-million-square-foot mark — and that’s just one player.
Amazon Warehouse Square Feet
Source: MWPVL, Jefferies
As with any industry, rising demand has translated into higher prices. With vacancy rates shrinking, rents for industrial property have climbed 9.2% over the past 12 months to reach an all-time high of $5.35 per square foot — more in some key markets.
Keep in mind, e-commerce currently accounts for just 10% of the nation’s overall retail spending ($500 billion annually out of $5 trillion total). And we are spending more online with each passing year. According to a study by commercial real estate group JLL, doubling market share to 20% would lead to 600 million square feet of incremental warehouse space demand, exerting continued upward pressure on rental rates.
That’s bad news for the renter — but great news for the landlord.
Of course, there are other renters in the industrial sector… factories, manufacturers, microbreweries, you name it. But e-commerce is the driving force right now. Leasing agents have been busy, as the absorption of empty space has been exceeding new supply for seven straight years. In turn, vacancy rates in the industrial real estate sector have fallen to 5.2% — a historic low.
Smart money from hedge funds and other institutional investors is piling in. Through the first half of 2017, 245 million square feet of industrial property has been acquired for $24 billion. That’s a 20% increase from this point last year.
Once forgotten, the industrial sector is suddenly becoming the star of the real estate world. And the market is taking notice. DCT Industrial Trust (NYSE: DCT), which owns a national portfolio of industrial assets leased to 900 different tenants, has enjoyed a cumulative return of 106% over the past three years.
— Nathan Slaughter
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Source: Street Authority