The retail sector is in a state of disruption. This is beyond the ebb-and-flow of the business cycle: This is structural. The meta-economic and technological dynamics underlying fundamental shifts in the consumer demand curve have been fermenting for more than a decade. We are just now observing the earliest signs of this industry shift.
Look at the retailers that either have or will be closing thousands of stores due to Chapter 11 bankruptcy, moving to online only or simply going out of business: Gordmans, Rue 21, Payless Shoes, Sports Authority, Gander Mountain, Wet Seal, Bebe and The Limited. Simon Property Group and General Growth Properties bailed out of bankruptcy Aeropostale, a long-held mall tenant. A bail-out that does not change the economic shifts that undermine the long-term viability of Aeropastle.
Then there are the mall anchor retailers, namely: Macy's, JCPenney and Sears. They're the canary-in-the-coal-mine. These retailers have reached the winter of their business lives. Retail shopping malls and centers are intertwined with this economic shift. What the canary signaled to miners is what retailers are signaling to mall owners.
Shopping malls are akin to putting all your eggs in one basket. True, this goose has been laying golden eggs for decades. However, if you own one that has been losing net operating income for some time, is increasingly being occupied by temporary tenants, where Sears and/or JCPenney is downsizing from two floors to one, then now is the time to evaluate the diversification of your holdings. Retail as you have known it for the past 20 to 30 years is no longer going to drive value.
Benjamin Graham's ideas on value investing were planted over 70 years ago. Now is a good time for owners and buyers of retail real estate properties to revisit those principles. In particular, the principle of concentrated diversification. This principle has solid implications of value-investing strategies that more broadly evaluate a portfolio that includes a more diversified mix of retail and non-retail uses.