The Zacks REIT and Equity Trust - Retail industry constituents are expected to benefit from the consumers' preference for in-store shopping experiences and the limited new supply of retail real estate space. Retail landlords' initiatives to bolster omnichannel retailing, enhance adaptive reuse capabilities and focus on e-commerce resistant sectors are expected to drive the industry's growth, posing Brixmor Property Group Inc. (BRX Quick QuoteBRX - Free Report) , Tanger Inc. (SKT Quick QuoteSKT - Free Report) and Saul Centers, Inc. (BFS Quick QuoteBFS - Free Report) to benefit.

However, concerns persist due to retailer bankruptcies, high expenses and potential financial strain, which could lead to more cautious real estate decisions and a potential rise in vacancy rates. 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. 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?

Low Supply to Help Fundamentals: Profitable retailers are expected to rent out more physical stores and expand their business opportunities with the easing of market conditions. The construction of new retail space has been sluggish due to high construction costs. 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 any economic slowdown and its impact on retail demand.

Omnichannel Retailing, Tenant Diversification and Revamp Efforts to Support Growth: Omnichannel retailing 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. 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. Several retail REITs are focused on raising operating performance through conversion, redevelopment, repurposing of assets and re-tenanting, and these REITs are expected to grab investors’ attention. 

Interest Rate Cut Expectations Boost Attractiveness: The recent signals suggesting a potential rate cut in the September FOMC meeting are likely to enhance the appeal of REITs. Even a modest reduction in rates is favorable for the rate-sensitive REIT sector, as these companies rely heavily on debt. Lower borrowing costs generally boost investor confidence in their performance. Reduced interest rates can lead to higher valuations for REITs. In such environments, their dividend yields become more attractive compared to yields from fixed-income investments and money market accounts.

Economic Concerns and Retailer Vulnerabilities Continue to Pose Challenges: Although the chances of the U.S. economy avoiding a recession are improving, consumers are likely to remain cautious, and retailers are expected to exhibit similar behavior. This is anticipated to influence retailers' leasing decisions. The recent rise in retailers seeking bankruptcy protection serves as a red flag. High construction and operating costs are expected to pose financial challenges for retailers, impacting their store expansion plans. The ongoing popularity of online shopping due to its convenience is likely to make retailers more conservative about expanding their physical stores. An increase in tenant bankruptcies could lead to more store closures, lower occupancy rates and reduced profitability for retailers. These factors are expected to dampen demand for retail space and negatively affect 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 #54, which places it in the top 22% 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 April, the industry’s FFO per share estimates for 2024 have moved marginally 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 Sector & 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 17% during this period compared with the S&P 500’s rise of 22.6% and the broader Finance sector’s growth of 23.5%.

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 16.48X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 21.19X. The industry is trading above the Finance sector’s forward 12-month P/E of 15.75X. 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 15.13X.

3 Retail REIT Stocks to Bet On

Brixmor: Headquartered in New York, the REIT is engaged in the ownership and operations of a national portfolio of open-air shopping centers. Its properties feature a diverse array of successful national, regional and local retailers.

BRX's shopping centers are strategically situated near residential areas, functioning as last-mile distribution hubs. The portfolio is carefully curated with non-discretionary and value-oriented retail, as well as consumer-oriented service providers.

Brixmor currently carries a Zacks Rank #2 (Buy). Over the past month, the Zacks Consensus Estimate for the current-year FFO per share has witnessed an upward revision to $2.13, indicating a 4.41% year-over-year rise. The stock has also risen 23.3% over the past three 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. 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. It boasts of a strong balance sheet position and ample liquidity.

SKT currently holds a Zacks Rank #2. The Zacks Consensus Estimate for the company’s 2024 FFO per share has been revised 1.5% upward over the past two months to $2.09, which suggests year-over-year growth of 6.63%. The consensus estimate for 2025 FFO per share of $2.19 also calls for a 4.55% increase year over year. The stock has appreciated 16.6% in the past three months.

Saul Centers: This Bethesda, MD-headquartered retail REIT is presently engaged in the operation and management of a real estate portfolio of 61 properties. The portfolio comprised 50 community and neighborhood shopping centers, seven mixed-use properties with roughly 9.8 million square feet of leasable area, and four land and development properties.

Saul Centers generates more than 85% of its property operating income from properties in the metropolitan Washington, DC/Baltimore area. Workforce trends, urbanization and the aftermath of the pandemic are reshaping tenant preferences, changing the way people work, live, play and shop, and Saul Centers, through its grocery-anchored, neighborhood shopping centers and mixed-use properties, remains well-poised to leverage favorable trends. Saul Centers targets anchoring its commercial properties with large, financially stable, essential businesses, which secures steady cash flows for the REIT.

Saul Centers currently carries a Zacks Rank #2. Over the past month, the Zacks Consensus Estimate for 2024 FFO per share has witnessed a 1% upward revision to $3.12, reflecting analysts’ bullish outlook. The stock has risen 10.7% 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.