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Can Macerich's Focus on Co-working Space Beat Retail Blues?

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Amid the retail apocalypse, mall landlords are making concerted efforts to boost their asset productivity by trying to grab attention from new and productive tenants, and disposing the non-productive ones. The companies are avoiding heavy dependence on apparel and accessories, and rather expanding their dining options, opening movie theaters, offering recreational facilities and opening fitness centers.

Particularly, Macerich Company (MAC - Free Report) recently announced a national partnership with premium workplace operator Industrious. This first-of-a-kind partnership, targeted at multi-property rollout, between a co-working company and a major mall owner is good news for the retail space.  

Per the partnership, Industrious will set up co-working spaces at selective Macerich’s properties. This will drive traffic and also complements top brands in the malls. This partnership is expected to debut at Scottsdale Fashion Square next January. Notably, Industrious is a preeminent leader in the budding co-working space and has an impressive track record of strong financial performance across its locations nationwide.

This apart, Macerich is aiming to enhance its assets quality, as well as customer relationships. Its increasing adoption of the omni-channel model in retailing is expected to boost shopping experience and enhance sales volume at tenant stores, thereby, spurring demand for Macerich’s properties. Also, re-leasing spreads for the quarter ended Jun 30, 2018, increased 12.3%, reflecting decent demand for its properties.

The company already has a high concentration of premium malls in certain vibrant U.S. markets and enjoys well-capitalized retailers in its tenant roster. Moreover, it has been diversifying its traditional tenant base by including several emerging digital and store-based retailers to offer enhanced shopping experience at the company’s retail centers.

Further, the U.S. economy is gaining strength, and consumer spending continues to be robust amid tax cuts and tighter labor market which is pushing up wages. This is evident from the recently-released retail sales figure for July that marked growth of 0.5%, higher than the consensus estimate of 0.1%.

Not only sales at non-store retailers increased in the month, but gains were also noticed across eight out of 13 categories, including a rebound in sales at clothing stores, improvement in sales at bars and restaurants, as well as growth in sales at department stores. This healthy environment paints an encouraging picture for the retail real estate industry as well.

Nevertheless, mall traffic continues to decline owing to a change in shopping patterns with online purchases taking precedence. This has forced retailers to reconsider their strategy and shift investments from traditional retailing to online channels, and optimize their brick-and-mortar presence.

These optimization efforts and the consequent decision to close stores by a number of retailers have raised concerns over cash flows of mall landlords. Also, retailers unable to cope with competition have been filing bankruptcies. This is affecting demand for retail real estate space and emerged as a pressing concern for retail REITs like Macerich, Simon Property Group Inc. (SPG - Free Report) , Kimco Realty Corp. (KIM - Free Report) , Taubman Centers, Inc. (TCO - Free Report) and others.

While Macerich is striving to counter such pressure through various initiatives, we expect bankruptcies and early terminations to keep the market challenging in 2018 and moderate growth.

Furthermore, the company has a substantial number of centers positioned across California, New York and Arizona. This geographical concentration risk may dampen its earnings in times of economic uncertainty. In addition, rise in interest rate is a concern for Macerich as this may restrict its ability to refinance existing debt, while the interest cost on new debt will go up. Also, the dividend payout might become less attractive than the yields on fixed income and money market accounts.

Macerich currently carries a Zacks Rank #3 (Hold). The share price of this retail REIT has gained 10.1% over the past year, outperforming the 3.5% increase registered by the industry during the same period.



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