As we reach mid-year 2024, retail real estate investment trusts (REITs) are experiencing a favorable market environment supported by supply constraints and the enduring relevance of brick-and-mortar stores. Analysts from BTIG, Raymond James, and Jefferies offer a positive outlook for the remainder of the year, anticipating higher leasing volumes and improved pricing power for REITs. Despite some consumer stress and required capital expenditures for vacant spaces, the overall sentiment remains optimistic for continued growth into 2025.
Retail Real Estate Fundamentals and Trends
Michael Gorman of BTIG highlights the strong fundamentals for strip centers, noting that retailer demand is the highest it has been in 15 years. The lack of new supply over the past decade has resulted in high leasing volumes and solid pricing power for REITs, leading to stronger same-store net operating income (NOI) in the latter half of 2024 and into 2025. However, there is a growing focus on the capital expenditures required to fill vacant spaces, which could moderate if occupancies stabilize.
RJ Milligan from Raymond James points out that the fundamentals for net lease and shopping centers are as strong as they have been since the Global Financial Crisis. The COVID-19 pandemic shifted the perception of retail real estate, with many retailers recognizing the value of physical stores. This has resulted in minimal tenant fallout and slight increases in guidance, with expectations for continued strength through the year and accelerating funds from operations (FFO) growth in 2025.
Linda Tsai of Jefferies notes that despite stock underperformance and low supply, shopping centers appear attractive in the second half of 2024. The muted transaction environment and challenges in issuing equity due to weak stock prices are expected to improve with lower inflation and potential interest rate cuts. Tsai emphasizes that REITs’ eagerness to acquire assets demonstrates confidence in tenant demand, contrasting with the pre-pandemic years when REITs were net sellers.
Consumer Spending and Market Dynamics
Analysts are observing conflicting trends in consumer spending. Gorman highlights record credit card debt and declining real wages, alongside elevated consumer sentiment and record checkable deposits. There is increased focus on portfolio quality, income demographics, and non-discretionary tenant exposure, suggesting a more defensive stance in the market. Tsai adds that pressure on low- and middle-income consumers is rising, evident in retailer restructurings and store closures. Despite these challenges, the main story for retail real estate remains the lack of supply and retailers’ commitment to brick-and-mortar stores.
Milligan notes that REITs primarily serve higher quality tenants, with strong retailer demand for space. This demand allows landlords to upgrade tenants and drive more traffic, leveraging limited available space to negotiate higher rents and secure the best tenants.
Opportunities and Development Trends
Tsai sees opportunities in net lease acquisitions, which have underperformed but offer accretive growth potential. She is constructive on shopping center fundamentals but more cautious about malls due to middle-income consumer challenges and store closures. Milligan emphasizes the opportunity to upgrade tenants, driving traffic and increasing center value. Gorman identifies investment opportunities in larger deals, where buyer pools are smaller and there are more levers for value-add.
The development trend in retail real estate remains constrained, with rising development costs making new supply difficult to justify. Redevelopment and re-tenanting offer the best returns, as REIT portfolios approach full occupancy and landlords gain negotiating power. Mixed-use developments incorporating food, entertainment, and residential elements are drawing traffic, particularly in dense markets.
Outlook and M&A Activity
The outlook for retail REITs includes watching traditional supply/demand dynamics, the impact of work-from-home trends on neighborhood retail, and the evolving role of technology in site selection and tenant relationships. Analysts are also monitoring the interplay between potential rate relief and a slower economic environment.
Public-to-public M&A activity is less likely due to current market conditions, but targeted deals and smaller transactions could occur. The quality of assets and strategic rationale will be key considerations for REITs looking to expand their portfolios.
In conclusion, retail REITs are well-positioned at mid-year 2024, with strong fundamentals and opportunities for growth. While challenges remain, the sector's resilience and adaptability to market dynamics suggest a positive outlook for the remainder of the year and beyond.
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