Retail REIT CEOs Address Shifts in Sector

Retail REIT executives say they continue to see solid growth potential in their sector, despite disruptive forces that are changing the operating landscape.

Speaking April 6 at a NYU Schack Institute symposium, executives sought to counter the impression that the entire retail REIT sector is facing pressure as the retail business has been hit with a wave of national store closings.

Sandeep Mathrani, CEO of GGP (NYSE: GGP), said the biggest issue for retail REITs is the quality of their real estate. “If you invest in the best real estate, you will thrive,” he said. Mathrani stressed that GGP is currently at full occupancy and that the pipeline of retailers wanting high-quality property is “very deep.”

Benjamin Schall, president and CEO of Seritage Growth Properties (NYSEMKT: SRG), observed that a number of retailers are actually growing. He noted that the company, which is the real estate spinoff of Sears Holding Corp., has been “extremely active” in repurposing former Sears properties.

Jeffrey Olson, chairman and CEO of Urban Edge Properties (NYSE: UE), said that when the company was spun off from Vornado Realty Trust (NYSE: VNO) in 2015, its portfolio occupancy rate was 96 percent. Today, it is in excess of 98 percent, he said.

Hap Stein, Jr., chairman and CEO of shopping center REIT Regency Centers Corp. (NYSE: REG), noted that while the retail sector has always been subject to disruption, “this time it is different.” Technological changes and e-commerce advances are forcing retailers to rethink their strategies, he said. As an example, Stein pointed to grocery retailers allowing customers to order online and pick up at their stores.

Craig McNab, outgoing chairman and CEO of National Retail Properties (NYSE: NNN), pointed out that retail REITs have “plenty of capacity” on their balance sheets. If financing conditions become more difficult, he said, REITs that are better managed will be well-positioned to take advantage of acquisition opportunities.

Online Retailers Setting Up Shop

One of the biggest changes in the retail segment is coming from companies that originate online, according to Mathrani. They’re now starting to open brick-and-mortar stores because they provide the most efficient way to get products to customers, he said.

Stein added that going forward, more successful retailers will pursue a dual approach that marries technology and brick-and-mortar storefronts. Well-located shopping centers will serve as a “relevant” distribution channel for these sellers, he said.

Blackstone’s Jonathan Gray says Retail Facing “Serious Headwinds”

Major investors who appeared at the NYU event shared mixed opinions on the state of the retail real estate market. Sherry Rexroad, co-global chief investment officer at BlackRock Global Real Estate Securities, said she worries that “all retail is being lumped together…it’s not one-size-fits-all.”

Similarly, Theodore Bigman, head of global listed real assets investing at Morgan Stanley, said he thought the retail narrative of the last few months had been “overdone.”

Cohen & Steers Executive Vice President Jon Cheigh, however, said his firm is “still relatively negative” on retail as the number of viable malls decreases each year. One major factor behind the trend has been the huge jump in smartphone penetration, according to Cheigh. At the same time, he said more retailers are coming to grips with the need to shutter stores.

Jonathan Gray, global head of real estate at The Blackstone Group private equity firm, commented that although retail real estate faces “serious headwinds,” Blackstone foresees a range of different outcomes in the sector. Two retail segments that the firm favors are grocery-anchored shopping centers and infill retail sites, according to Gray.

Amid the changing retail landscape, Gray said a clear beneficiary has emerged: industrial real estate. Companies that specialize in logistics properties are seeing increased demand for space as a result of the e-commerce’s growth, according to Gray.

“It’s hard not to be enthusiastic around logistics, in particular, around this last mile,” Gray said.