02/12/2013 | by
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Coming off a strong performance in 2012, retail REITs do face concerns about slow job growth and chain store closings.

The FTSE NAREIT U.S. Real Estate Index series showed total returns of 22.17 percent for retail REITs in 2012. That beat the total returns of equity REITs, which were up 16.66 percent for the year, according to the index data. The S&P 500 was up 16 percent for the year. 

Early on in 2013, the retail sector has kept pace, up 5.02 percent through Feb. 11. Through the same period, the S&P 500 has gained 6.59 percent, while the equity REIT index has climbed 4.96 percent.

Since the start of 2012, the national unemployment rate has declined from 8.3 percent to 7.9 percent, but Lail says more robust job growth is needed in 2013 to help drive consumer spending and lift sector fundamentals. As retail REITs start to post their earnings from the fourth quarter of 2012, investors will be looking to see if occupancies continued an upturn that started in the third quarter.

“The retail sector is still in the midst of its slow climb back towards pre-recession occupancy and rental rates,” said Jason Lail, senior industry analyst with research firm SNL Financial.

Susan Persin, managing director with Trepp LLC, a commercial real estate consulting firm, said rents in the retail sector have stabilized in many metro areas and shown noticeable increases for “the best product in the best markets.”

“Demand was driven by retailers and restaurants that sought good locations for expansion and became more receptive to longer-term leases,” Persin said. “At the same time, limited new construction fueled demand for existing space.” 

Now, however, ongoing exposure to risky tenants could turn out to be an issue that plagues retail REITs. For example, Lail noted that bookseller Barnes & Noble has set a goal of closing 30 percent of its stores, about 20 per year, in the course of the next 10 years. Additionally, electronics retailer Best Buy announced this month that it would be closing 15 stores in Canada.

Lail pointed out that other potential headwinds for the retail sector include concerns over specialty and superstores “further infringing on the traditional grocery store concept.”  That could, in turn, lead to more grocery store closings going forward.