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Retail Fought Its Way Back To Pre-Pandemic Normalcy. But Those Weren’t Exactly Great Times

After a tough few years for retailers and the landlords who rent them space, some semblance of normalcy has returned to the market.

Shoppers are shopping again and, at least for now, spending more at retailers despite inflation, supply chain woes and political tumult. With certain exceptions, the beating major mall owners took during the coronavirus crisis era is behind them. 

But none of that paves a clear path to a bright new post-pandemic future.

The emergency might be over, but lingering pre-pandemic challenges for malls remain (such as online competition), combined with new macroeconomic problems (such as inflation). The mixed results for retail REITs during the first quarter of 2022, and investor reluctance to buy into the sector, reflect that uncertainty.


“March retail sales show that consumers have maintained their ability to spend in the face of record-level inflation, supply chain issues and geopolitical unrest,” National Retail Federation President and CEO Matthew Shay said in an April statement.

In March, retail spending was up 6.2% compared with a year ago, not counting auto sales and gas station sales, according to the Census Bureau. Much of that increase came from physical store sales as online sales gained only 1.6% for the year in March.

Indeed, the spike in e-commerce has settled down, a trend that might offer relief to physical retailers. After rising to 16% of all retail sales during the pandemic, online sales have dropped to about 13% during the first quarter of 2022, according to the bureau.

Consumer willingness to spend has been supported by rapid hiring, increased wages and larger-than-usual tax refunds, NRF Chief Economist Jack Kleinhenz said. At the same time, consumers are dealing with the shock of gas prices — largely by driving less — and the prospect of higher interest rates by paying down debt, at least credit card debt.

Even so, investors remain mostly skeptical of major public REITs that focus on retail real estate. A year ago, the FTSE NAREIT Equity Retail index stood at around 260. As of May 10, 2022, the index stood at just a shade below 240.

Among the individual REITs, stock prices are a mixed indicator. Some major REITs that suffered significant dips during the worst of the pandemic are now enjoying a recovery — but hardly all of them.

Kimco Realty Corp.'s stock price, for instance, has been down more than 8.3% in the last five days, but up about 21% over the last five years. Regency Centers Corp. also dropped about 8.3% over the last five days, but gained 8.4% over the last five years. Realty Income Corp. stock has dropped more than 6% over the last five days, yet gained almost 20% over the last five years. 

On the other hand, Federal Realty Investment Trust, whose stock has dropped more than 7% over the last five days, has seen a long-term decline — more than 12% over the last five years. Macerich Co. eked out a five-day gain of about 0.5% but suffered more than 77% stock-price drop over the last five years.

Among major retail owners, PREIT stood out this week for the recent sharp decline in its stock price: more than 33% over the last five days. Over the last five years, its stock has cratered, down more than 96%. Currently PREIT stock is trading below $1 a share. 

Simon Properties, the nation's largest mall owner, with 186M SF spread over more than 250 properties, reported lower income for the first quarter of 2022, but higher funds from operations — an important REIT metric that describes cash flow from operations and is regarded as a yardstick for operating performance.

For Simon, Q1 2022 net income came in at $426.6M, or $1.30 per share, as compared to $445.9M, or $1.36 per share for the same quarter in 2021.

"Leasing momentum, retailer sales and cash flow all accelerated," Simon Chairman David Simon said, further noting the company is raising its quarterly dividend and increasing its full-year 2022 guidance.

Simon's stock gained briefly after the earnings report, but on the whole, investor reaction to the stock has been lackluster. Over the last five days, prices are down 1.6%; over the last five years, prices are down by about 25%.

On the company's earnings call on Monday, David Simon characterized the company's depressed stock price as an opportunity for Simon to buy back its own stock relatively inexpensively. Recently, Simon's board of directors authorized a new common stock repurchase program, effective May 16, under which the company can buy up to $2B of its common stock over the next two years.

“We think it’s an opportunity to be opportunistic in terms of buying our [own] stock back,” Simon said. “Don’t believe what you read or any rumors out there. We’re really focused on growing our existing platforms and taking advantage of the opportunities that our lower stock price represents."

The rumor alluded to is a recent report that Simon, which bought JCPenney out of bankruptcy in 2020, might make a bid for department store chain Kohl’s.

Simon said on the call the company had signed more than 900 leases for upward of 3M SF during the quarter and has "a significant number of leases" in its pipeline. He also said that Q1 marked the best quarter for deals since 2016 and the lowest occupancy cost in seven years.

Before the pandemic, Simon noted, global retailers wanted to be in China. Now they are more interested in the domestic market as retail spending expands. Still, inflation is a worry.

“Inflation is a huge issue and we need to do everything we can to figure out, as the world and individual countries, how to deal with the impact of inflation for the lower-income consumer,” Simon said.


Simon wasn't the only mall CEO to mention inflation in recent days.

"Inflation persists as an important topic on the minds of many stakeholders, and I want to emphasize that we believe our business is, by design, well-positioned to drive value in this climate," Realty Income Corp. CEO Sumit Roy said during his company's Q1 earnings call May 5.

As prices increase, many of Realty Income's tenants will be able to pass the cost on to their consumers or suppliers, Roy said.

"As a triple net lease REIT, our business is insulated from inflation," he said.

Realty Income's first-quarter 2022 funds from operations came in at 98 cents per share, an increase year-over-year from 86 cents. The REIT's revenues spiked to $807.3M for the quarter, up 82.5% from a year ago.

"A-quality mall sector has done OK during inflationary times because we have been able to keep pace," Macerich CEO Tom O'Hern said during his company's earnings call Monday. Macerich owns about 48M SF, consisting mainly of interests in 44 regional town centers. 

"In any given year, it's possible inflation could be higher than [5%] over the course of the term of the lease, say, five or seven years," he said. "It seems like we're always going to be ahead [of] those 5% bumps."

In any case, O'Hern added, retail sales are up because people want to shop again.

"The resiliency of the American consumer is once again on display," he said. "Shoppers have come roaring back to our centers to shop with a purpose."

Despite that enthusiasm, the company lost $37.2M, or 17 cents per share, during the first quarter of 2022, though that counts as an improvement from Q1 2021 when the company tallied a loss of $63.6M, or 40 cents per share.

Funds from operations for Macerich during the first quarter of 2022 were $37M, or 49% higher than Q1 2021. FFO per share for the quarter was 50 cents per share, up from 45 cents a year ago.

PREIT, which owns regional malls in the Philadelphia region and elsewhere, faces a raft of problems, including debt and pending loan maturities. PREIT Chairman and CEO Joe Coradino said the company is focused on selling assets to improve its balance sheet during its Q1 earnings call last week.

"It's clear that the mission in front of us is to achieve the credit facility extension and raise capital to de-lever the balance sheet," Coradino said. 

To that end, the company is ramping up its asset sale pipeline, which Coradino said now has $275M of transactions in process "as new opportunities to harvest capital are presenting themselves."

PREIT did report an improvement during Q1 2022 in that its loss wasn't as much as last year. The company's net loss for the first quarter of 2022 came in at $39.3M, or 49 cents per share, compared with $49.6M, or 64 cents per share for the same period in 2021. PREIT's funds from operations for Q1 2021 were a negative penny per share, compared to a negative 14 cents a share during Q1 2021.


Physical retailers face other ongoing challenges, LGIM Real Assets Head of Retail & Futuring Denz Ibrahim said, but have the tools to respond.

"The process of creating great retail places today goes far beyond the physicality of real estate, brands and architecture alone," Ibrahim said. "Development can no longer just be 'done to' a place. It should be suited and unique to the environment in which it resides."

Injecting vibrancy and experience enables retail owners to turn a quick trip to the shops into a unique experience, Ibrahim said.  

Destination malls are still a draw, but managers at such properties say they aren't relying on that alone to keep their properties healthy. Bringing customers in is an active process and one that never ends.

"Galleria Dallas takes seriously its commitment to being a gathering space for all north Texans and the tourists who visit DFW," Galleria Dallas General Manager Angie Freed said regarding the property, a 1.4M SF regional mall owned by private investor UBS Realty Investors.

"As a result, we continue to see traffic and sales increases month-over-month, and our retailers are having success, which is attracting new tenants," Freed said. "Also, we partner with our tenants to help them succeed, with programs such as our recent job fair."

Still, the macroeconomic risks to retail sales remain considerable. Global consultancy Kearney estimates, for instance, that continued supply chain disruptions could cost the North American apparel and footwear industry alone between $9B and $17B in 2022. 

Those losses would come on top of the disruptions in 2021, when the apparel and footwear industry was hit with a variety of unanticipated cost increases, including the rising cost of cotton (up 40%), transpacific container shipping (up 300%) and air freight (up 50%), according to Kearney, with labor shortages and retail wage pressures further complicating the picture.