Industry Ups & Downs Impact Retail REITs

By Jerry Shapiro, Managing Director, BDO Consulting, L.L.C.: The retail REIT sector has the right framework in place for success. Under the surface, however, general shifts in the retail industry will likely be the driving force behind retail REIT performance this year.

Jerry Shapiro hi-res

The retail REIT sector has the right framework in place for success: interest rates remain attractive in the first quarter of 2014, despite the Federal Reserve Bank’s commitment to quantitative easing, capital is accessible, and retail vacancy rates remain largely unchanged. Beyond the surface, however, general shifts in the retail industry will likely be the driving force behind retail REIT performance this year. While retail isn’t going to die and positive indicators have been forecasted, brick-and-mortar stores continue to suffer in the wake of the economic crisis and the continuing inroads of e-commerce.

Retail REITs have delivered double digit returns (12.5 percent) over the past 10 years, according to the National Association of Real Estate Investment Trusts.

As of mid-February, the largest U.S. retail REITs are trading positively from their 12-month low, with Simon Property Group (SPG) at $158.47 (low of $142.47), Kimco Realty Corp (KIM) at $21.23 (low of $19.22), and General Growth Properties (GGP) at $20.73 (low of $18.63). While current trading prices don’t penetrate the 12-month highs, they bode well for the sector, which often wears the scars of the U.S. economy’s troubles.

The retail REIT sector is at the mercy of larger economic factors, from consumer confidence and holiday sales, to bankruptcy for the weak and over-leveraged, and consolidation.

The National Retail Federation forecasts a 4.1 percent increase in retail sales for this year andstronger household and business confidence should spur more consumer spending overall.” However, this comes on the heels of largely lackluster holiday sales and retail bankruptcies, downsizings and woes.

The future of the retail industry remains unpredictable, as e-commerce threatens in-store sales and consumer tastes shift. And, thus, the retail REIT sector, which is directly impacted by tenants’ ability to lease property and pay rents, will likely remain risky, and industry professionals and investors alike should be cognizant of property type and location as well as retailer type that the REIT finances.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.