Death of the Shopping Mall
America’s largest shopping centers have shown signs of life recently, but that hasn’t stopped one prominent hedge fund manager from betting bigger stakes on their demise. Eric Yip, chief investment officer of Alder Hill Management, is doubling down on his wager that the shopping-mall death spiral will continue.
Betting on the Death of Traditional Retail
As The Wall Street Journal reports, Yin has upped his purchases of a credit default swap index that tracks the price of mortgages backed by commercial real estate. CMBX, the asset in question, increases in value when indebted shopping centers struggle to make payments or default on their loans entirely.
The elements of the CMBX 6 index with the lowest credit ratings declined at least 9.5% in 2017 before bouncing back this year. Although traditional retail hasn’t died out as quickly as some of the short-sellers anticipated, the general belief among the bears is that the market is over-stored.
“The U.S. is simply over-stored, and the least-productive properties must ultimately disappear in order to restore balance,” Alder Hill Management wrote in its July report. “That burden will be borne by owners and creditors alike.”
Why Should We Care?
While it’s easy to blame Amazon.com and other e-commerce stores for the death of retail, the sector’s demise highlights deeper issues facing the U.S. economy – most notably, the consumer spending segment that drives more than 70% of GDP.
Monthly retail sales – an important proxy for consumption – have grown less than 0.4% on average between 1992 and 2018. The component has been highly volatile over the past five years despite a red-hot labor market producing more than 200,000 jobs per month.
In reality, the U.S. economy is entering its fifth decade of wage stagnation – a phenomenon that appears to have begun in 1973 with the sharp slowdown in productivity growth. It was around this time that business dynamism – the process by which companies continually are born, fail, expand, and contract – also fell. (In the late 1970s, 14% of companies were less than a year old; in 2017, that figure was 8%.)
Average hourly earnings, an important indicator of wage inflation, have picked up under the Trump administration but remain weak overall. This not only reflects slow productivity growth, it speaks volumes to the quality of jobs being created in the economy.
Record debt levels are also to blame for retail’s never-ending death spiral. Household debt in the form of mortgages, student loans, auto and credit cards have increased for five consecutive years, surpassing $13 trillion for the first time in history.
As stock broker and financial commentator Peter Schiff notes, the combination of rising debt and stagnant wages has been the biggest squeeze on big-box retailers:
“Another reason people are shopping on the internet, other than just the convenience of not leaving your house when you’re doing your shopping, is the fact that the average American shopper is broke. They can barely afford to buy the stuff that they’re buying. In fact, most people are buying stuff that they can’t afford. They’re just buying anyway and they’re using a credit card…Retailing is a shrinking market because Americans’ pocketbooks are shrinking, their paychecks are shrinking.”
While we shouldn’t pretend that e-commerce is solely responsible for the demise of physical shopping centers, it is definitely playing an important role. In 2017, U.S. online retail sales surged 16% to $453.5 billion compared with only 4.4% growth in the broader sector. E-commerce represented 13% of total retail sales in 2017, up from 11.6% the year before.
Featured image courtesy of Shutterstock.