Retail Space Market Fundamentals Remain Strong: CoStar

Retail REITs own and manage retail real estate and rent space in those properties to tenants. Properties can include large regional malls, outlet centers, grocery-anchored shopping centers, and power centers that feature big box retailers. Despite the considerable gains in e-commerce sales and its expected strong growth, retailers have increasingly appreciated the benefits that brick-and-mortar stores provide, including marketing, order fulfillment, and product returns.

Green Street assigns grades to U.S. regional and super-regional malls. The best malls are assigned grades of A- or better. Approximately 25% of malls are A-rated and they account for roughly 80% of total mall value. More than half of U.S. malls are assigned grades of B- or worse. These malls typically face dim prospects. Publicly traded retail REITs tend to focus on better-quality malls and control approximately 50% of U.S. malls by asset value.

Macy’s recently announced a plan, “A Bold New Chapter,” to fundamentally reposition the retailer. One facet of the plan includes the closure of approximately 150 less-productive stores through 2026. Note that Macy’s currently operates roughly 500 stores. Analysts predict that these closures may hasten the demise of many lower-quality malls. Mall REITs covered by Green Street have little exposure to the retailer at lower-quality malls.  

Recent data from CoStar show that retail space market fundamentals remain strong. In the fourth quarter of 2023, it was the only sector of the four traditional property types where demand exceeded supply. As a result, the retail occupancy rate continued its ascent to reach an all-time high, while the industrial, apartment, and office occupancy rates maintained their declines. Year-over-year rent growth moderated slightly to 3.4%; it remained above its pre-pandemic level.

Data from Nareit’s T-Tracker® show that retail property operations and balance sheets have also maintained strength. As of the third quarter of 2023, average year-over-year funds from operations (FFO) and same-store net operating income (SS NOI) increased by 4.1% and 3.8%, respectively. The weighted average term to maturity on total debt was 6.7 years. On average, fixed rate debt accounted for 93.7% of total debt; its weighted average cost was 3.9%.

• 10: CoStar data indicates that retail demand has exceeded the sector’s limited supply for 10 straight quarters, as of the fourth quarter of 2023.
• 15.4%: In its 2023 fourth quarter report, the Census Bureau indicated that retail e-commerce sales accounted for 15.4% of total sales in 2023.
• 80%: According to Green Street, roughly 80% of mall net operating income (NOI) comes from inline tenants, or non-anchor tenants.

Below is a list of Nareit member companies from the retail sector.