Simon: Retail "Flight to Bricks and Mortar" is Real

Whatever doesn’t kill us makes us stronger. That’s the message from the nation’s largest mall owner, which this week reported another quarter of record sales.

David Simon, president and CEO of Simon Property Group, wants everyone to know that the obituaries for indoor shopping malls during the pandemic were premature: the tables have turned, Simon says, with a solid recovery that has become a “flight to bricks and mortar” while e-commerce appears to be on the ropes.

“Many have tried to kill off physical retail real estate, and in particular in closed malls. When physical retail was closed [during the pandemic], all the naysayers were saying that physical retail was gone forever,” Simon said in a Q3 earnings call.

“However, the brick-and-mortar retailer is strong and e-commerce is flat-lining. We have yet to see any pullback in opening new stores or renewals,” the REIT CEO said. “Most of the pressure is in the e-commerce business, so the flight toward bricks and mortar is real. It’s going to be sustained.”

Simon Property Group continue to sustain the sales and leasing momentum the REIT notched in Q2—when leasing totaled more than 4M SF and retailer sales hit a record of $746 per SF at its malls and outlets—through the third quarter.

The REIT reported another retail sales record of $749/SF for its malls and outlets in Q3, with malls alone hitting $677/SF. Simon signed nearly 900 leases encompassing more than 3M SF in the third quarter, bring the total through the first nine months of the year to more 10M SF and 3,100 leases.

Occupancy at Simon’s malls ended the third quarter at 94.5%, an increase of 60 bps compared to Q2 and a 170-bps increase YOY. The REIT’s average base minimum rent increased for the fourth quarter in a row in Q3 to $54.80.

“Our shopper remains resilient,” the company said in the Q3 earnings report. “We continue to have a significant number of leases in our pipeline. The opening rate on our new leases has increased 10% since last year, roughly $6 per lease.”

When Simon was asked whether he’s concerned about an economic slowdown hitting during the holiday season or in 2023, the REIT CEO said he’s “unbelievably confident” that physical retail will continue to produce a solid ROI “because physical retail is where the action is.”

“That’s where the return on investment is. So even if we may slow down next year or even into the holiday season, I don’t think the growth from our existing business is going to slow down because the demand for new deals and space is there,” Simon said.