Higher-quality malls can also benefit from strong growth in inline tenant sales (a primary driver of mall operating income, expected to average 3.4% during the next 10 years) as well as shifting the tenant mix to more Internet-resistant offerings, including experiential services.

“There is no question that bricks-and-mortar retail has endured headwinds, and our physical offer, our stores and our retailers have needed to adjust for new consumer preferences,” says Matthew Strotton, global director of capital with QIC's Global Real Estate investment arm. “But we believe that predictions of the demise of the US mall are overdone. In fact, in our macro and micro analysis of competing factors that impact the sector, we see robust growth for strategically managed A and B grade malls over the coming 10 years. These findings contribute directly into our future planning, including how we view the new retail model as part of an overall town center/mixed use offering.”

In assessing mall sales, the study also develops a more accurate nuanced picture of malls by grade–A, B and C/D.

“Despite the negative headlines around the challenges facing the retail sector, it is important not to lose sight of the many nuanced underlying drivers of mall sales growth,” Strotton says. “With this much more detailed understanding, as well as our ability to actively manage quality assets, we see strong potential to build further value in our US mall portfolio and deliver exceptional outcomes for investors.”

Among the study's key findings, published in August 2018 are:

US macroeconomic factors of low unemployment, rising wages, strong balance sheets and recent tax cuts will drive strong 3.5% annual growth in brick and mortar sales during the next 10 years, even as e-commerce's share of the retail market doubles.

In competing with e-commerce, department stores and stores selling electronics/appliances, sporting goods and books/music will be hardest hit, losing 20% market share during the next decade.

Food services, with little e-commerce penetration, i.e., stores selling food, beverages and other perishables and stores that sell health care products that require in-store services, will fare better. Consumers also prefer entertainment and personal services, fast-growing segments with low levels of e-commerce penetration.

Retailers executing an omni-channel sales strategy can leverage physical space to showcase products, build brand awareness, engage with customers and enable “click and collect” and “click and deliver” services. They can use the advantages of physical retail space in these and other ways to complement, rather than compete against e-commerce.

“In conducting our quantitative analysis of the US retail sector, we employed a top-down and bottom-up approach bringing together and scrutinizing all relevant data, enabling us to present a full view of the sector's outlook,” says Dr. Matthew Peter, QIC's chief economist and the paper's co-author. “This analysis begins at the macroeconomic level by forecasting personal consumption and moves on to look with a microeconomic lens at sales at retail outlets, i.e., bricks-and-mortar and e-commerce, and malls as a whole.”