Performance of Retail REITs Mixed as Consumer Preferences Shift

This article is republished with permission from REITCafe.

Department stores, once the dependable anchor tenants at many malls, according to a Seeking Alpha analysis, have been hit the hardest by e-commerce and millennial trends as mall traffic sank 12.3 percent in November and December. This caused regional mall real estate investment trusts (REITs) to take a dive in 2016. According to the National Association of Real Estate Investment Trusts (NAREIT), regional mall REITs posted total yearly returns of –5.2 percent. However, the broader retail REIT sector brought in a 0.95 percent total return for 2016, and 0.5 percent for 2017 year-to-date (YTD). Within the sector, freestanding retail REITs significantly outperformed mall REITs and shopping centers last year overall. The freestanding subsector posted a 17.02 percent total return for 2016, while shopping centers climbed 3.68 percent.

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The retail sector landscape has shifted considerably over the last few years, made evident by many familiar big-box retailers announcing bankruptcies and store closures. Despite the many longstanding retailers committing to shutter many or all of their brick-and-mortar storefronts, a contributor on Forbes.com writes that “the death of the traditional retail storefront is overblown,” as physical locations are “quietly evolving through the integration of digital innovations, ultimately vying to offer consumers a true omnichannel retail environment.” Thus, newer companies that can balance and grow alongside the rise of e-commerce have not met the same fate as some big-box retailers.

Shoppers continue to favor online shopping, discount stores, and specialty stores. These trends will further shape the retail sector and, consequently, retail REITs. Thus far in 2017, regional mall REITs have seen a 1.17 percent total return, likely due to leasing recovery from backfilling vacancies with more popular retailers. Freestanding retail REITs are not far behind, with 1.13 percent returns YTD.

According to research firm Zacks, “amid rising competition from online retailers, retail REITs are focusing on the omnichannel retailing concept, transforming their boring shopping hubs into swanky entertainment zones and distribution centers as well as embracing the latest technologies to offer attractive services to tenants and mall visitors. Eventually, such measures are likely to help in increasing traffic.”

It seems the retail sector is undergoing a major shift to cater to millennials, which hurt department stores and mall REITs in 2016 and has favored specialty stores and freestanding retail REITs. Rising consumer confidence and increased consumer spending give reason to be optimistic about the retail market going forward. However, the success between different REITs is still closely tied to the “survival of the fittest” of its underlying tenants.

* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.