Retail Apparel Apocalypse Creates Opportunity in Shopping Center REITs

We’ve all heard of the retail apocalypse.

Brick and mortar retail is getting squeezed by e-commerce. Stores are shutting down. Mall foot traffic is in a steady state of decline. Therefore, all retail real estate related investments need to be sold and avoided.

According to Sorin Capital, the retail apocalypse is actually the apparel retail apocalypse

Yes, in the U.S. there is an excess of retail associated real estate. Per U.S. citizen, there is an average of 23 sq ft o retail real estate. In the rest of the developed Western economies, this average is 5 sq ft.

But the bulk of this excess retail real estate is apparel.

Apparel, home electronics, and books are easily displaced by e-commerce. It is easy to ship these items and the cost to ship them compared to their price is favorable.

This real estate is under the greatest threat and it is greatest at the Mall.

Malls In Decline

The original business plan of the mall was to anchor a location with big name department stores. The mall operators offered the department cheap rent to be anchor stores.

The department stores would attract foot traffic. This would draw in smaller stores to the mall. The mall operator would charge the smaller non- anchor stores higher rents. The stores agreed to the higher rent because of the high foot traffic and potential sales.

The anchor stores like Macy’s, JC Penney’s, Sears are under pressure and closing stores. Foot traffic is declining too. The mall business structure needs to change and adapt.

Shopping Center REIT Opportunity

While foot traffic is declining at malls, shopping centers are holding up. Especially, grocery anchored shopping centers. A 3% increase YOY in foot traffic is what Sorin Capital said in the interview.

But shopping center real estate is being treated the same as mall real estate. It is being sold and avoided because it is retail focused. And this creates opportunity.

shopping center REITs

List of shopping center REITs from Wikipedia.