Is It Finally Retail REITs Turn?

By Aaron Levitt | May 24, 2012 AAA

After feeling the worst of the global credit crisis and resulting recession, commercial real estate has spent the last two years riding high. Overall, broad measures of the sector like the iShares Dow Jones US Real Estate ETF (ARCA:IYR) have put up quite impressive returns as investors have flocked to the sectors inflation-resistant and high-yielding nature. While some subsectors like multi-family housing and storage properties have surged in the wake of the credit crisis, others have floundered. One such subsector has been the retail operators. Driven by cost-cutting consumers and high unemployment, firms operating the shopping strip mall space have been left behind. However, things may be finally turning the corner for the retail REITs.

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Improving Metrics
After getting trounced during The Great Recession, the retail real estate space spent much of the last two years floundering. However, things are finally looking up for the market. Improving consumer confidence and employment numbers are putting a little more money in retailers' coffers. U.S. chain-store sales last month rose 4.1% from a year earlier, while unemployment continues to tick down and currently sits at 8.3%. That's directly benefiting vacancies and rental rates for retail commercial real estate operators.

According to real estate analytic firm REIS (Nasdaq:REIS), vacancies in the shopping space continue to fall, with occupied space rising by a net 2.96 million square feet during the first quarter of 2012. That's the second-largest increase since retail centers began losing tenants in the first quarter of 2008. Overall, shopping center vacancies stood at 10.9%, down from 11% in the last quarter of 2011. Likewise, regional malls saw lower vacancy rates. REIS also noted an uptick in rents for various shopping properties during the first chunk of the year. Helping spur this, aside from higher consumer spending, has been a constrained building environment. The number of new shopping plaza and mall construction projects has been roughly zero when compared to historical norms. That's helped drive up rent rates, despite the fact that some retailers have been shuttering stores.

SEE: Consumer Spending As A Market Indicator

These factors have helped the retail real estate sector finally post some real positive returns. According to industry group NAREIT, the retail REIT sector reported a total return of 19.5% as of end of April. With any improvements to the economy, retail CRE should be able to continue its gains.

Time to Buy a Mall
Given the recent bullishness in the sector, it may be time for investors to give the retail real estate sector a go. For investors looking for a broad way to add a swath of retail CRE to a portfolio, the iShares FTSE NAREIT Retail ETF (ARCA:RTL) could be a good bet. The ETF tracks 30 retail REIT heavyweights including Simon Property Group (NYSE:SPG) and Macerich (NYSE:MAC). The fund yields a healthy 2.86%. However, the main drawback to the fund is that it hardly trades. For a retail REIT-oriented portfolio, the best bets are in individual choices.

SEE: Should You Buy Stock Or An ETF?

Fresh off of its divestiture of its industrial portfolio, Weingarten Realty (NYSE:WRI) could be a great way to retail's rise. The firm plans on using the $382 million it raised from the sale to purchase more retail-focused properties across its operating markets. Those core markets seem to be working as both FFO and occupancy rates improved on Weingarten's last quarter. Shares of the REIT yield a market beating 4.4%. Also seeing higher earnings and FFO is the largest U.S.-based shopping center landlord, Kimco Realty (NYSE:KIM)

Finally, mall-based REITs are beginning to see promising signs of recovery as consumers return and vacancy rates shrink. Both CBL & Associates (NYSE:CBL) and Taubman Centers (NYSE:TCO) offer investors a way to play both the high-end and middle-market shopping malls.

SEE: How To Assess A Real Estate Investment Trust (REIT)

The Bottom Line
As commercial real estate rebounded from the depths of Great Recession, the retail sub-sector was left behind. However, the sector is now showing some signs of life. For investors, it could finally be time to bet on the beleaguered mall operators. The previous firms, along with Realty Income (NYSE:O), make ideal selections.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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