Consumers' preference for in-store shopping experiences and the limited new supply of retail real estate space are likely to benefit the constituents of the Zacks REIT and Equity Trust - Retail industry. Retail landlords’ efforts to support omnichannel retailing, adaptive reuse capabilities and a focus on e-commerce resistant sectors are likely to aid this industry’s growth and have poised Realty Income Corporation (O Quick QuoteO - Free Report) , Essential Properties Realty Trust, Inc. (EPRT Quick QuoteEPRT - Free Report) and Retail Opportunity Investments Corp. (ROIC Quick QuoteROIC - Free Report) to benefit.

However, concerns persist due to retailer bankruptcies, elevated borrowing costs, high expenses and potential financial strain, which could lead to more cautious real estate decisions and a potential rise in vacancy rates. Additionally, online shopping will continue to be popular due to its convenience.

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 the 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: With consumer spending likely to be backed by income growth and employment, retailers are expected to experience healthy demand. Also, profitable retailers are expected to rent out more physical stores and expand their business opportunities with the easing of the economic conditions. Consequently, retail REITs will experience increased demand for their spaces, leading to enhanced leasing activity. Furthermore, the construction of new retail space has been sluggish due to high construction costs. Additionally, landlords of struggling malls and centers have increasingly opted for mixed-use developments in recent years, removing a significant portion of retail space from the market. This limited supply is expected to support the fundamentals of the retail real estate industry, even in the face of economic challenges and their impact on retail demand.

Omnichannel Retailing and Tenant Diversification to Support Growth: Omnichannel retailing has gained momentum in recent years and has become the focal point for many retailers. Even digitally-native brands are expanding their physical presence to strengthen customer connections. Omnichannel retailing allows customers to physically inspect products, reducing the frequency of return orders, which helps protect retailers' margins often impacted by large online returns. Additionally, retail landlords are exploring ways to diversify their offerings by incorporating healthcare providers, fitness centers, childcare facilities and recreational experiences into their shopping centers. This diversification is expected to result in a steady flow of rental revenues.

Economic Concerns and Retailer Vulnerabilities Continue to Pose Challenges: While the likelihood of the U.S. economy avoiding a recession is increasing, consumers are still likely to become more cautious, and retailers are expected to exhibit similar behavior. This is expected to affect the leasing decisions of retailers. Additionally, the significant increase in retailers seeking bankruptcy protection in recent years is a warning sign. The high cost of debt and elevated construction and operating expenses are expected to create financial challenges for retailers. Online shopping, due to its convenience, will continue to be popular, likely causing retailers to be more conservative with their store expansion plans. Any uptick in tenants filing for bankruptcy is likely to result in increased store closures, 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 #66, which places it in the top 26% 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. Over the past year, the industry’s FFO per share estimates for 2024 have moved 1.5% north.

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 2.1% during this period compared with the S&P 500’s rise of 25.1% and the broader Finance sector’s growth of 21.2%.

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 14.81X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 22.01X. The industry is trading above the Finance sector’s forward 12-month P/E of 14.75X. 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 15.11X.

3 Retail REIT Stocks to Bet On

Retail Opportunity Investments Corp.: This REIT specializes in the acquisition, ownership and management of grocery-anchored shopping centers situated in densely populated, metropolitan markets across the West Coast. 

With well-established, open-air grocery-anchored shopping centers located in the heart of sought-after, mature, affluent, diverse communities in select, leading metro markets on the West Coast and resilient tenants predominantly focused on basic consumer goods and services, this retail REIT is poised to ride the growth curve.

A focus on essential retail tenants has been helping the retail REIT in recent years, and this trend is expected to continue in the upcoming quarters as well.

While the Zacks Consensus Estimate for the company’s 2024 FFO per share has been unrevised over the past month at $1.05, the same for 2025 has been revised up a cent to $1.09. The stock has appreciated 9.8% in the past three months. ROIC currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

 

 

Realty Income Corporation: The REIT is mainly engaged in the acquisition and management of freestanding commercial properties that generate rental revenues under long-term net lease agreements. 

High dependence on tenants belonging to service, non-discretionary and low-price retail businesses, which are less susceptible to economic recessions and competition from Internet retailing, provide stable rental revenues. Accretive buyouts and diversification, backed by a healthy balance sheet, bode well for long-term growth. 

O currently holds a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the company’s 2024 FFO per share has been revised two cents upward over the past month to $4.21, which suggests year-over-year growth of 5.25%.

The consensus estimate for 2025 FFO per share of $4.36 also calls for a 3.5% increase year over year. The stock has appreciated 9.2% in the past three months.

 

 

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 car washes, early childhood education, medical/dental, quick service restaurants, automotive service, entertainment, casual dining, equipment rental and sales sectors. Essential Properties focuses on service-oriented and experience-based tenants. Such businesses are less susceptible to competition from Internet retailing.

With a weighted average lease term of 14.1 years and an average unit-level rent coverage ratio of 3.9 as of Mar 31, 2024, EPRT is well-poised to ride the growth curve. 

Essential Properties currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2024 FFO per share of $1.74 suggests a 5.45% increase year over year. The consensus estimate for 2025 FFO per share of $1.87 also indicates 7.5% projected growth year over year. The stock has risen 20% over the past three 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.