2021 was marked by a burst of optimism, a robust return of foot traffic and sales and then the arrival of new variants that threw all that progress into question. Green Street retail sector analyst Paulina Rojas Schmidt offered Commerce + Communities Today Joel Groover a data-driven view from her work tracking the likes of strip centers, department stores and clicks-to-bricks retailers.

Heading into Year Three of the pandemic, how do investors see marketplaces?

From a big-picture perspective, the pandemic has shined a positive light on retail real estate. Many retailers accelerated their pace of adaptation to e-commerce and came out of the pandemic stronger. In addition, contrary to what was expected in the early days of COVID, the consensus view is that stores are more valuable for retailers today than they were in ’19. The higher adoption of buy-online-pick-up-in-store and delivery from store has underlined the complementary nature of brick-and-mortar stores and e-commerce. The U.S. remains over-retailed, but the strongest retailers are more competitive today than they were in ’19, and the weakest ones were flushed out of the system in an accelerated fashion.

How did retail REITs perform last year amid these dynamics?

Investors in retail REITs had a phenomenal 2021. The strip center and mall REIT indexes were up 65% and 92%, respectively, compared to 29% for the S&P 500 and 43% for the FTSE NAREIT Equity REIT Index. However, ’21 shouldn’t be evaluated in isolation, as it was mostly a rebound from ’20 when the retail sector was hammered during the onset of COVID. If we examine a two-year period since the end of 2019, mall and strip center REITs have not been winning sectors. They have both exhibited a total return in the neighborhood of 20% but have lagged the S&P 500 and the FTSE NAREIT Equity REIT Index by a wide margin.

And yet that total return was a far cry from some of the catastrophic predictions that we saw in 2020, right?

The impact of the pandemic on strip center and mall fundamentals has been more modest than initially expected. Occupancy troughed in the first quarter of 2021 at a higher level than anticipated and is forecasted to recover relatively quickly amid a robust leasing environment. Surprisingly strong retail sales, both from e-commerce and brick-and-mortar stores, has been one of the major forces behind this positive development.