The Zacks REIT and Equity Trust - Retail industry constituents are expected to benefit from consumers’ growing preference for in-store shopping experiences and limited new supply of retail real estate space. Efforts to support omnichannel retailing, adaptive reuse capabilities and a focus on e-commerce resistant sectors have poised Essential Properties Realty Trust, Inc. (EPRT Quick QuoteEPRT - Free Report) and Tanger Inc. (SKT Quick QuoteSKT - Free Report) well for growth.

Nevertheless, concerns loom due to rising retailer bankruptcies, elevated borrowing costs, high expenses and potential financial strain, which could lead to cautious real estate decisions and a possible uptick in vacancy rates. Also, given the convenience it offers, online shopping will remain a popular choice.

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 surrounding trade areas critically determine demand. While reduced footfall, store closures and retailer insolvencies once troubled the industry, it is now seeing a recovery due to renewed consumer enthusiasm for in-store shopping.

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

Healthy Demand Amid Low Supply to Help Fundamentals: Demand for retail real estate is expected to remain healthy in the upcoming period amid strength in the job market. Retailers are likely to rent out more physical stores and expand their business opportunities to satisfy consumers’ growing interest in in-store shopping. Consequently, retail REITs will experience increased demand for their spaces, leading to enhanced leasing activity. Moreover, the construction of new retail space remains dreary amid high construction costs. Also, with struggling malls and centers’ landlords opting for mixed-use developments over the past years, a sizeable part of retail space has been removed from the market. This limited supply is likely to support the retail real estate industry fundamentals, even in case of any challenging economic backdrop and its corresponding impact on retail demand.

Omnichannel Retailing and Diversifying Tenant Base to Aid Growth: In recent years, omnichannel retailing has gained momentum and has become the focal point for many retailers. Even digitally-native brands can be seen expanding their physical presence to bolster customer connections. Through omnichannel retailing, customers can physically check their products, which cannot be done online, thus lowering the frequency of return orders. This prevents retailers from losing their margins, which is often the case with huge online return orders. Furthermore, retail landlords are exploring ways to provide a diverse range of offerings, such as healthcare providers, fitness centers, childcare facilities and recreational experiences in their shopping centers. This diversification is expected to result in a steady flow of rental revenues.

Economic Concerns and Retailer Vulnerabilities Remain Headwinds: Though inflation is moderating, it is still a concern as it is leading to the adoption of a more cautious spending attitude by consumers. Moreover, the notable increase in retailers seeking bankruptcy protection in recent years serves as a red flag. Additionally, the high cost of debt and elevated construction and operating expenses are likely to create financial challenges for retailers. Also, given the convenience it offers, online shopping will remain a popular choice. This is also likely to make retailers more restrained in their store expansion plans. Any uptick in tenants filing for bankruptcy lately is likely to hurt occupancy levels and affect retailers’ profitability. Such issues are expected to moderate the demand for retail space as well as cast a pall on landlords’ cash flows.

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 #89, which places it in the top 35% 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 robust 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-end 2023, the industry’s FFO per share estimates for 2024 and 2025 have moved 1.5% and 0.5% north, 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 Underperforms the Sector & the S&P 500

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

The industry has advanced 7.8% during this period compared with the S&P 500’s rise of 28.3% and the broader Finance sector’s growth of 26.1%.

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 14.58X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 21.38X. The industry is trading below the Finance sector’s forward 12-month P/E of 15.62X. 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 15.20X.

2 Retail REIT Stocks to Bet On

Essential Properties: This Princeton, NJ-headquartered REIT is engaged in the ownership, acquisition and management of mainly single-tenant properties, which are net leased to service-oriented and experience-based businesses on a long-term basis.

The company serves casual dining, car washes, automotive services, medical services, convenience stores, equipment rental, entertainment, early childhood education and health and fitness sectors. The company focuses on service-oriented and experience-based tenants. Such businesses are less susceptible to competition from Internet retailing.

Its portfolio comprises 1,873 properties across 48 states and caters to the real estate needs of 374 tenants coming from 16 different industries. With a weighted average lease term of 14 years and a weighted average rent coverage ratio of 3.8 as of Dec 31, 2023, EPRT is well-poised to ride the growth curve.

Essential Properties currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2024 FFO per share has been revised 1.7% upward over the past month to $1.80. It also suggests a 9.1% increase year over year. The consensus estimate for 2025 FFO per share has moved 3.2% northward over the past month. The stock has risen 20% over the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Tanger: This Greensboro, NC-headquartered REIT is an owner and operator of outlet and open-air retail shopping destinations with more than 43 years of expertise in the industry. Its portfolio of 38 outlet centers, one adjacent managed center and one open-air lifestyle center encompassing more than 15 million square feet is strategically located across tourist destinations and in the thriving markets of 20 U.S. states and Canada.

Given that the majority of SKT’s portfolio is of an open-air format, it provides brands and retailers with an attractive and integral sales channel. Moreover, the company’s centers are sought out by consumers for branded merchandise at consistent value. With open-air centers becoming increasingly popular, Tanger seems well-poised to capitalize on the solid fundamentals of the retail real estate market.

SKT currently holds a Zacks Rank #2. The Zacks Consensus Estimate for the company’s 2024 FFO per share has been revised a cent upward over the past two months to $2.06, which suggests year-over-year growth of 5.1%. The consensus estimate for 2025 FFO per share of $2.16 also calls for a 4.85% increase year over year. The stock has appreciated 25.7% in 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.