The Zacks REIT and Equity Trust - Retail industry players stand to reap the rewards of a resurgent interest in in-store shopping post-pandemic, sustained consumer demand and a limited supply of retail spaces. Retail REITs are enjoying improved leasing and pricing capabilities, whereas retailers are capitalizing on physical locations as showrooms and pickup points. Low vacancy rates and a shift toward open-air shopping centers highlight retailers' adaptability. Omnichannel strategies and diversification have mitigated the e-commerce threat to physical stores. Amid these, Brixmor Property Group Inc. (BRX Quick QuoteBRX - Free Report) , Phillips Edison & Company (PECO Quick QuotePECO - Free Report) , and Tanger Factory Outlet Centers (SKT Quick QuoteSKT - Free Report) are well-positioned for growth.  

Nevertheless, concerns loom due to rising retailer bankruptcies, elevated costs and potential financial strain, which could lead to cautious real estate decisions and a possible uptick in vacancy rates.

Industry Description

The Zacks REIT and Equity Trust - Retail industry embodies a group of REITs that own, develop, manage and lease diverse retail spaces. These include regional malls, outlet centers, grocery-anchored shopping venues and power centers, including big-box retailers. Also, net lease REITs enjoy the ownership of freestanding properties, wherein rent and the majority of operating expenses for the properties are borne by tenants. Retail REITs are significantly influenced by the broader economic health, employment landscape and consumer spending patterns. Factors like the geographical position of properties and the demographics of the surrounding trade areas critically determine demand. While reduced footfall, store closures and retailer insolvencies once troubled the industry, it is now seeing a resurgence due to renewed consumer enthusiasm for in-store shopping.

What's Shaping the Future of the REIT and Equity Trust - Retail Industry?

Revived Interest in In-Store Shopping, Persistent Demand & Limited Supply: Consumers' renewed interest in unique in-store experiences following the pandemic is fueling growth of the retail real estate sector. Physical stores, which offer sustained profitability and foster customer engagement, have prompted businesses to prioritize expansion rather than closures. This has boosted the demand for store spaces, benefiting retail REITs through enhanced leasing and pricing capabilities. Retailers are also leveraging their physical locations as showrooms and hubs for pickups or exchanges, mitigating the rising costs associated with last-mile deliveries. Also, the impending holiday season is of great importance to retailers, making up a significant portion of their annual revenues. However, the development of new retail venues has been sluggish due to high expenses, and many underperforming malls are transforming into mixed-use spaces, thereby reducing the availability of retail spaces. There is a trend toward open-air shopping centers over non-prime malls, reflecting retailers' adaptation to shifting consumer preferences and changing shopping habits.

Omnichannel Strategy, Diversification and Adaptation: Physical stores continue to hold a vital role in the long term, as online shopping, while convenient, cannot replace the advantages and satisfaction of visiting a brick-and-mortar establishment. Recent foot traffic trends indicate that consumers prefer to research products online but often complete purchases or pick up items in stores. Retailers are leveraging their physical spaces more innovatively, using them to fulfill online orders, handle returns, test products and engage with customers in ways that cannot be replicated online. This multifunctional approach to retail spaces underscores the continued importance and value of physical retail locations. Digitally-native brands are also expanding their physical presence to bolster customer connections and facilitate growth as part of their omnichannel strategies. Furthermore, shopping centers are evolving to accommodate a more diverse array of tenants than in the past, including essential services like healthcare providers, fitness centers, childcare facilities and recreational experiences. This diversification is further bolstered by the increasing prevalence of hybrid work models and population growth in suburban areas.

Economic Concerns and Retailer Vulnerabilities: Despite some promising signs, such as low vacancy rates and limited supply, there are looming concerns for this asset category. Specifically, the notable increase in retailers seeking bankruptcy protection in 2023 from the previous year serves as a red flag. Additionally, the escalating costs of debt, high construction and operating expenses, and choppy sales in select discretionary sectors are likely to create financial challenges for retailers. Consumers, too, are facing a range of economic difficulties, such as inflation, rising interest rates, the return of student loan obligations and depleting savings. Moreover, a broader pullback in consumer spending, especially in a choppy macroeconomic environment, could further strain the sector. These concerns might lead to more cautious real estate decisions and a potential uptick in vacancy rates.

Zacks Industry Rank Indicates Bright Prospects

The Zacks REIT and Equity Trust - Retail industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #72, which places it in the top 29% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of the upward funds from operations (FFO) per share outlook for the constituent companies in aggregate. Looking at the aggregate FFO per share estimate revisions, it appears that analysts are gaining confidence in this group’s growth potential. Since July 2023, the industry’s FFO per share estimates for 2023 and 2024 have moved up 1.3% and 1%, respectively.  

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Surpasses the Sector but Lags the S&P 500

The REIT and Equity Trust - Retail Industry has outperformed the broader Zacks Finance sector over the past year but underperformed the S&P 500 composite.

The industry has rallied 11.1% during this period compared with the S&P 500’s rise of 19.7%. Meanwhile, the broader Finance sector has grown 11.0%.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-FFO, which is a commonly used multiple for valuing retail REITs, we see that the industry is currently trading at 12.89X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 18.40X. The industry is trading above the Finance sector’s forward 12-month P/E of 12.71X. These are shown in the chart below.

Forward 12 Month Price-to-FFO (P/FFO) Ratio

Over the last five years, the industry has traded as high as 18.87X and as low as 10.42X, with a median of 15.41X.

3 Retail REIT Stocks to Buy

Brixmor: Headquartered in New York, NY, the company is engaged in the ownership and operations of a national portfolio of open-air shopping centers. Its properties are home to a diverse mix of thriving national, regional and local retailers.

BRX's shopping centers are strategically situated near residential areas, effectively functioning as last-mile distribution hubs. The portfolio is carefully curated with non-discretionary essentials and value-oriented retail offerings.

Brixmor currently carries a Zacks Rank #2 (Buy). Over the past two months, the Zacks Consensus Estimate for the current-year FFO per share has witnessed an upward revision to $2.03, indicating a 4.1% year-over-year rise. The stock has also risen 7.5% over the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Phillips Edison: PECO, based in Cincinnati, OH, specializes in the ownership and operation of omni-channel grocery-anchored shopping centers. As of Jun 30, 2023, the company managed 294 shopping centers, including 274 wholly-owned centers comprising 31.4 million square feet across 31 states and 20 shopping centers owned in one institutional joint venture.

PECO's centers showcase a blend of national and regional retailers offering essential goods and services in strong markets across the United States. This ensures steady rent revenues from the tenants.

PECO currently carries a Zacks Rank #2. Over the past week, the Zacks Consensus Estimate for 2023 FFO per share has witnessed a marginal upward revision to $2.33, reflecting analysts’ bullish outlook. The stock has rallied 4.5% over the past six months.

Tanger: The Greensboro, NC-headquartered company is an operator of upscale open-air outlet centers. SKT operates centers spanning 14 million square feet, situated in 20 U.S. states and Canada. These centers are leased to more than 2,700 stores run by more than 600 distinct brand-name companies.

With more than 42 years of experience in the outlet industry, Tanger is poised to benefit from the healthy fundamentals of the retail real estate market. The company’s open-air portfolio offers brands and retailers an attractive and integral sales channel, while customers look for its centers for branded merchandise at consistent value.

SKT currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2023 FFO per share has been revised marginally upward over the month to $1.89. It indicates a 3.3% year-over-year rise. The stock has gained 15.5% over the past six months.

Note: Funds from operations (FFO) is a widely used metric to gauge the performance of REITs rather than net income as it indicates cash flow from their operations. FFO is obtained after adding depreciation and amortization to earnings and subtracting the gains on sales.