The Demise Of The Mall

Near where I live here in the San Francisco Bay Area there is a glitzy new mall about to open. It boasts an IMAX theater, trendy restaurants, and a Babies ”R” Us store. However, there is one oddity in the new development. The Babies ”R” Us store is having a going out of business sale. It is the first occasion I can recall when a store had a going out of business sale before it opened for business.

We’ve all heard this story before. Malls are dying. Commerce is moving online at ba reakneck pace. Investing in retail is a death wish. No less a figure than Bill Gates, Sr. told me that in a decade, malls would only be inhabited by climbing walls and paintball courses, and that was a decade ago.

When I saw the first malls setting up during the 1960s, they were considered “The Place to go.” I witness the same during the 1980s in England. Except it didn’t quite work out that way. Lesser quality malls are playing out Mr. Gates’ dire forecast. But others are booming. It turns out that there are malls, and then there are malls.

There is one big kicker here that no one notices except me. If my prediction that this is not a low-interest rate decade, but A LOW-INTEREST CENTURY turns out to be correct, then mall REITs with their high yields are the “BUY” of the century, but only if you have a very long-term view.

Let me expand a bit on my thesis. Technology is moving forward at an exponential rate. As a result, product performances are improving dramatically, while costs are falling. Commodity and energy prices are also rising; they are but a tiny fraction of the cost of production. In other words, DEFLATION IS HERE TO STAY!

The nearest hint of real inflation won’t arrive until the 2020s, when Millennials become big spenders, driving up the cost of everything. We also have a Fed that is raising interest rates at a snail’s pace, only 25 basis points at a time. Interest rates may peak at 4% in this cycle, and then go negative when we go into the next recession.

So, let’s go back to the REIT thing. Real Estate Investment Trusts are a creation of the Internal Revenue Code, which gives preferential tax treatment for investment in malls and other income generating properties. There are 1,100 malls in the United States. Some 464 of these are rated as B+ or better and are concentrated in the biggest spending parts of the country (San Francisco, North New Jersey, Greenwich, CT, etc.).

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