The Resilience of Shopping Center REITs: Insights from Christopher Wimmer
The retail landscape in the United States has undergone a significant transformation in recent years, particularly in the wake of the COVID-19 pandemic. Shopping centers, including strip, power, and neighborhood centers, have faced numerous challenges but have also shown remarkable resilience and recovery. Christopher Wimmer, a senior director at Fitch Ratings, provides valuable insights into the current state of shopping center Real Estate Investment Trusts (REITs) and the factors driving their growth.
The Impact of the Pandemic and Recovery
The COVID-19 pandemic brought unprecedented challenges to shopping centers across the U.S. Lockdowns, social distancing measures, and changing consumer behaviors led to a decline in foot traffic and sales. However, government support programs played a crucial role in stabilizing the retail sector during this tumultuous period. As the economy began to recover, shopping centers experienced a resurgence, with average growth rates of 2 to 3 percent over the past five years.
Wimmer notes that despite ongoing macroeconomic challenges such as inflation and fluctuating consumer spending, shopping center REITs have benefited from several tailwinds. The designation of grocery stores as essential services during the pandemic has been particularly advantageous, allowing these centers to maintain steady foot traffic and sales.
A Shift in Construction Trends
One of the most significant trends affecting shopping center REITs is the decline in new construction. Prior to the 2008 financial crisis, the retail sector saw an annual growth of over 1,000 million square feet in new shopping center construction. However, this figure has drastically decreased, with only 20 to 30 million square feet of new supply being added each year in recent times.
This slowdown in construction is a double-edged sword. While it reflects broader economic challenges, it also creates a favorable environment for existing shopping center REITs. With fewer new retail spaces being built, demand for existing locations increases. Wimmer highlights that despite headlines focusing on store closures, the past three years have seen more stores open than close, indicating a healthy demand for retail space. As a result, when a space becomes vacant, it is likely to be leased quickly, further enhancing the stability of shopping center REITs.
The Evolution of Tenant Mix
The retail landscape is evolving, and shopping center REITs are adapting by replacing struggling big-box retailers with stronger anchor tenants, particularly grocery stores. This shift not only stabilizes income streams but also enhances the overall credit quality of the tenant mix. Many shopping center REITs feature tenants with investment-grade credit ratings, providing a buffer against potential downturns in performance.
Wimmer points out that while enclosed malls continue to struggle due to the rise of e-commerce and changing consumer habits, shopping centers that prioritize essential services and diverse tenant portfolios are thriving. The growth in net operating income for these REITs, coupled with the potential for future rent increases, positions them as attractive investment opportunities.
Increased Investor Interest and Access to Capital
As the retail sector stabilizes, investor interest in shopping center REITs is on the rise. Centers anchored by grocery stores are particularly appealing, leading to an increase in partnerships between investors and REITs. The volatility experienced during the pandemic has subsided, and shopping center REIT equities are now trading at a premium.
Wimmer emphasizes that this renewed interest is supported by effective balance sheet management and strategic mergers and acquisitions (M&A). As shopping center REITs continue to demonstrate resilience and growth potential, positive credit rating activity is expected in the long term.
Conclusion
Christopher Wimmer’s insights into the shopping center REIT sector reveal a landscape marked by resilience and adaptability. Despite the challenges posed by the pandemic and evolving consumer behaviors, shopping center REITs have shown a remarkable ability to recover and thrive. With a favorable construction environment, a diverse tenant mix, and increasing investor interest, the future looks promising for shopping center REITs as they navigate the complexities of the retail landscape. As the sector continues to evolve, Wimmer’s expertise will undoubtedly play a crucial role in guiding investors and stakeholders through this dynamic environment.
