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Remember the nineties? Grunge rock. Pleated pants. Zima (it was ahead of it’s time!).

Malls.

Malls were very much a thing in the nineties. While Howard Schultz claims credit for coining the term “third place” with his Starbucks real estate strategy, the concept had already existed for decades, in the form of the suburban shopping mall.

They even made a movie about it.

Above: Retail associate admonishes patron for lack of shopping agenda

Anchored by major department stores like Sears and Macy’s, malls drew crowds of shoppers, who then ate at the food court, in turn driving social traffic, which then fed specialty retailers (think ear-piercing booths and custom tee-shirt shops). When the film Mallrats hit theaters, in 1995, malls were very much on the upswing, as evidenced by Sears’ stock price at the time.

Source: historicalstockinfo.com

America’s third place was, unsurprisingly, sought-after real estate. Sears would go on to purchase many of the malls its stores anchored, doubling down on a bet that a nation, growing in both numbers and prosperity, would continue to congregate in shopping-centric suburban spaces.

As we know, they were wrong.

According to this article by the WSJ, even the most well-positioned malls have seen their value dwindle, while lesser malls are owned by creditors, desperately hoping to be bailed out by an adaptive reuse project. Sears ultimately spun its real estate holdings into a REIT called Seritage Growth Properties (SRG); its lingering market cap letting investors continue to lose money on Sears-anchored shopping malls, years after the operating business had declared bankruptcy.

It’s instructive to examine exactly what made their thesis wrong.

The throwaway answer is that suburban malls were killed off by online retail, especially from Amazon. This answer is unsatisfying, however, as Walmart and Costco continue to print record profits every year. Americans still shop in person.

Instead, it appears that what killed the mall is not Amazon, but Starbucks; or at the very least, the evolution of the cultural zeitgeist that Starbucks represents (and that made Howard Schultz a billionaire). That is, at some point in the last 30 years, the mall was no longer the “Third Place” for America.

We started going back downtown and hanging out at coffee shops. Once this change began happening, it kept happening. People began hanging out where the people were hanging out. The virtuous cycle for the urban core became the mirror image of the vicious cycle for the suburban mall.

Ironically, it is precisely the mallrats with no shopping agenda that made shopping malls successful.

Real estate investing is, at its heart, about predicting where and how people will prefer to spend their time. Changes in those preferences are both infrequent and difficult to predict, but the very agglomeration effects that drive the success of shopping malls and Starbucks locations can cause sharp reversals of fortune.

In other words, people want to be where the people are. Once the mall is no longer the “Third Place” to meet and see and be seen, its only value to the consumer is as a shopping location, and it is less efficient in that role than a big box store or e-commerce portal.

Similarly, once a vibrant downtown commercial district is no longer a “Second Place” to pitch a great new idea to your boss’s boss in a serendipitous elevator encounter, its only value to a worker is as a location in which to be productive. For many knowledge workers, it is less efficient in that role than a laptop with Zoom installed.

As a result, once a downtown starts leaking high-skilled workers, it’s extremely difficult to reverse the tide.

Universal remote work is probably a net negative for firms and workers and society, but no individual entity is incentivized to unilaterally decide to come to work when there is no guarantee anyone else will be there to work with them. This is the lose/lose payoff quadrant in the proverbial stag hunt. This is also why urbanists are encouraging cities to reimagine the draw of downtown outside of just a place to work.

Agglomeration logic holds not only for the Second Place (work) and Third Place (public social space), but for our American First Place (home) as well. On the margin, people move to where people are moving.

In a world that combines a lack of affordable housing in successful urban areas with the increased ability to work remotely, that increasingly means they are moving to places with low costs of living and mild winters. They are also moving to locations with increased flood risk. Arguably, these phenomena are policy-driven, as restrictions on supply growth in more environmentally defensible areas is what drives their lack of affordability.

Like Ben Affleck’s character in Mallrats, the NIMBY desire to preserve property values by limiting housing supply (and therefore limiting access for younger and less affluent would-be residents) is ultimately self-defeating. While effective at buoying housing prices in the short run, any policy that discourages regional population growth is liable to have negative long run economic consequences.

The Rest Of Resi

• Montana gets how agglomeration effects work, and is building more houses.

  
  

• Unfortunately, it’s impossible to find construction workers to build them.

  
  

• Multifamily sector needs to roll $1 Trn of debt.

  
  

• Real estate’s inefficiencies still nurture promising proptech ideas.

  
  

• USD strength deters foreign buyers of US real estate.

  
  

• Judge denies Zillow’s motion for summary judgement in REX suit. It seems like the stakes were higher in the halcyon days of high transaction volume.

  
  

• Elon is “loyal to San Francisco.” - Perhaps it’s because he’s not paying his rent, and any new prospective landlord would make him pay years of rent up front?

  
  

• Buster Posey is loyal to San Francisco, and coming back after a brief stint in Georgia. This motivation seems more pure. I look forward to watching his kids dominate little league again.

  
  

• The great Rolex recession - It turns out that artificially-constrained, positional assets can’t compete with real interest rates.

T-RECS Of The Month: Albuquerque, NM

It’s not just the success of the Oppenheimer movie (or that other famous TV scientist - I think chemistry was more his bag). Albuquerque has the lowest housing costs of any major western city, a mild climate, and is an important center for the technology and film industries.