Why haven’t shopping malls collapsed yet?

I honestly have no idea how malls are surviving financially post-Amazon.

Literally every mall I have visited in recent years has been mostly empty, to the point that you kind of felt unsafe being there. (And some are quite unsafe now.) In the town we lived in before moving here, they put in an outdoor mall with lots of luxury stores and nice restaurants. People pretty much only went there for the restaurants. You would see folks walking around and window-shopping, but no one would be carrying a shopping bag. It became something of a game for us to try to spot someone with a shopping bag while sitting out on a restaurant patio. A Where’s Waldo for finance geeks.

I buy virtually everything online now. That’s mostly through Amazon, but there are some products that I will buy directly from a company (Aveda hair products, for example). We buy so much stuff from Amazon that our garage fills up each month with boxes, and we have to make multiple trips with an SUV full of flattened boxes to the recycling center. I feel like this is typical suburban life for our generation.

The only shopping that we do in person is grocery shopping. I feel like I would probably do grocery shopping online too if Publix did not exist and we weren’t such obsessive cooks. Publix is simply a superlative grocery store chain. They find the best food options and everyone there has Southern manners. It’s a pleasure to be there.

Anyway, back to malls. Malls look like they are failing financially, if your metric is attracting people who actually buy stuff and not elderly women in walking clubs. Everyone agrees that Amazon dominates retail, with Walmart and Target as bothersome little gnats in their line of business.

So why is betting against malls such a pain trade? What is propping them up? That’s an honest question, because I have no idea.

Rockstar investor (and now Florida resident) Carl Icahn is the latest to make a big bet on the collapse of malls. He’ll make $400 million if malls run into problems servicing their debt.

The Wall Street Journal seems to think that malls have survived by finding an endless pipeline of new retail ventures to replace the ones that have moved out.

I just don’t understand this either. If you were running a brick-and-mortar business and choosing a location, wouldn’t one of your first questions before leasing be “how did the business that was here before me perform?” You wouldn’t place a restaurant in a location where three restaurants before you have failed to attract enough traffic. But apparently that logic doesn’t work for malls. They can always replace a failing Draper James with a tattoo parlor, at least until millennials run out of un-inked skin.

From the WSJ:

Mr. Icahn’s trade puts him on a collision course with two of the largest money managers, including Putnam Investments and AllianceBernstein Holding LP, which are more upbeat on malls.

The face-off is “the biggest battle in the mortgage bond market today,” said Dan McNamara, a principal at MP Securitized Credit Partners, a New York hedge fund. He said the showdown is the talk of this corner of the bond market, where more than $10 billion of potential profits are at stake on an obscure index.

Each side of the trade is speculating on the direction of an index, called CMBX 6, which tracks the value of 25 commercial-mortgage-backed securities, or CMBS. The index has grabbed investor attention because it has significant exposure to loans made in 2012 to malls that lately have been running into difficulties. Bulls profit when the index rises and shorts make money when it falls.

A slice of the index tracking some of its riskiest debt has climbed about 20% year to date, suggesting growing optimism about the malls, shopping centers and outlets connected to the index.

Malls have suffered rising vacancies and falling foot traffic as shoppers make more purchases online. But many landlords have continued to service their debt by finding new tenants. Some owners have also been able to modify or secure extensions to their loans.

Over the past year, the biggest losers in the trade have included New York-based hedge-fund investor Eric Yip, who is shuttering his fund Alder Hill Management LP, which once managed $300 million but sustained heavy losses betting against this index over the past year, according to a person familiar with the matter.

Mr. Yip, who worked for Mr. Icahn in the 2000s and marketed his trade through presentations with bankers and investors to try to get others to join his bearish stance to push the index lower, was forced to exit his loss-making trade over the summer after the index jumped in price, according people familiar with the matter.

Other shorts have also backed off after suffering their own losses, another reason the index is rising.

Enter Mr. Icahn, a former hedge-fund titan who now invests his own money. He is famous for taking on public crusades against corporate targets, including a high-profile win purchasing shares of Herbalife Nutrition in a bruising battle with Bill Ackman’s hedge fund Pershing Square Capital, which had shorted the nutritional products company over a period of five years and ended up exiting the trade last year.

Mr. Icahn has been purchasing insurance contracts called credit-default swaps. The contracts provide holders with protection against defaults of commercial-backed securities that include the debt of malls and other borrowers.

The CMBX 6 is an index of credit-default swaps designed to mimic the performance of the 25 mortgage-backed securities. When investors bet on rising mall defaults, they buy these contracts, sending the index lower.  Mr. Icahn makes money from these contracts when the CMBX 6 index drops.

These contracts provide protection—like any insurance contract—but don’t impact the businesses of tenants or malls, so Mr. Icahn’s moves don’t have a bearing on whether landlords make their loan payments.

Mr. Icahn has lost millions on this trade, but he hasn’t backed off and may even add to his bearish trade that he considers a long-term position, these people said. Mr. Icahn’s insurance contracts will pay off if landlords run into difficulty paying back their debt by 2022.

Seems to me the problem is less with the thesis and more with the structure of the trade (i.e. the index everyone is betting for/against is not actually representative of American retail). Indeed, “only three of the roughly 40 malls and shopping centers linked to the CMBX 6 have been delinquent on their loans since 2012.” There are many more vacant malls than that in the United States.

Alliance Bernstein seems to be going on tour arguing that the death of malls has been greatly exaggerated by short-sellers pushing false narratives. I don’t know where the folks at Alliance Bernstein shop, but it sure as shit is not at malls, which are even fairly empty in the holiday season these years. But there are plenty of wealthy households who will give them their money to put into mall debt, apparently, because they’ve bet big on malls thriving despite Amazon. That’s just insane.

3 thoughts on “Why haven’t shopping malls collapsed yet?

  1. A rising tide lifts all boats, even the leaky ones. Sometimes it’s nice to be around people. Malls are good for that, like the old village marketplaces. It will be a shame if we lose that.

    Maybe malls can host gun shows! That would sidestep the political pressure for county fairgrounds to ban them.

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  2. I buy pretty much everything except groceries from Amazon, but I wouldn’t bury malls just yet. Stores are failing because they are crappy stores, not because they are in malls. Retailers are constantly reinventing themselves to meet shifting demand. TJ Maxx, as an example, is currently doing very well. As long as the economy remains healthy, brick and mortar stores can concede billions in revenue to Amazon, and still have other billions to target as long as they execute well.

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    1. See, I don’t disagree with that at all. I know quite a few very good and unique retailers where I deliberately look for their products. But a mall is an assembly of retailers, and it’s just so hard for me to square my personal experiences of walking through empty malls with what’s happening in the financial world. In the past, when I have had that sort of disconnect, I’d start to get worried. But we are in a consumer’s economy, and part of that is that it’s just hard to take retail down as a group. It’s like the old saying that the market can stay irrational longer than you can stay solvent. That seems to be what we are seeing here. Everyone knows the trend, but the delusion is going to take everyone’e lunch money.

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