3 Retail REIT Stocks Set To Escape Pandemic-Led Industry Weakness

Structural Changes, Omni-Channel Strategy to Remain Key Focus: While earlier the emphasis of retail REITs was on transforming traditional retail hubs into entertainment destinations and lifestyle resorts, the focus has now shifted toward essential retail-like groceries and convenience stores, and curbside pick-ups in light of the pandemic. Importantly, omnichannel will remain the focal point for retailers and physical stores will remain a vital sales channel in the long run because though there is convenience in online shopping, it cannot replace the benefits and satisfaction of visiting a brick-and-mortar store. Apart from serving as showrooms, physical stores also offer a convenient location for pick-up or exchange of goods. Therefore, as retailers turn more toward the omnichannel strategy for higher customer satisfaction and more loyalty, with the aim of generating higher profits, it is logical for them to not only boost their online presence but also maintain brick-and-mortar stores in the best locations, raising hopes for retail REITs that focus on such locations. Moreover, as part of the omnichannel strategy, digitally-native brands too are likely to keep boosting their physical presence in the days to come. This is because opening of stores help to them to improve their connection with customers and drive expansion. Therefore, once the concerns of the pandemic end, brick-and-mortar stores will regain their popularity in delivering physical experiences apart from becoming valuable in the fulfillment of digital sales.

Repurposing and Conversions to Pick Up Pace: Importantly, the current situation is prompting adaptive reuse as well as conversions of malls into distribution hubs as these distribution centers, being situated close to the consumers of retailers, facilitate faster delivery of products as well as aid retailers in improving services, lower costs and make optimum asset utilization. Adaptive reuse includes multifamily, hotel, office, and medical components and thereby constructs a mixed-use real estate destination. However, the structural changes involve huge outlay, and with continued pressure on rents and vacancy, rent collection, and deferral woes, profit margins are likely to be affected in the near term.

Vaccination Drive, Macroeconomic Gains to Drive Recovery: Situations have improved compared to the onset of the pandemic, and rent collections are improving. Specifically, retail properties having more exposure to essential retail businesses are well navigating the blues. However, the rate of recovery is likely to gain pace with widespread vaccinations, the realization of the full impact of the fiscal stimulus, and faster economic recovery. Although the initial months of the current year have posed challenges, the back half might witness some improvement with vaccines becoming widely available. This would help normal activities to resume and workers to return to offices, and go out for lunch and shopping around their workplace. Moreover, retail REITs will continue benefiting from the Fed’s low-rate stance because REITs depend on debt for the business. Thus, these companies benefit from lower borrowing costs in a low-rate environment. Also, with borrowing costs remaining low, credit-related retail spending usually remains strong, indicating better prospects for retail real estate landlords. However, the ones with better balance-sheet strength are likely to withstand the coronavirus blues. Further, consolidation in the industry can open up chances for the survivors to grow their market share and capitalize on the recovery.

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