Wall Street’s New Darlings: Retail REITs?

Retail REITs logged higher returns for their investors in the fourth quarter of 2022 than did REITs in other property types, according to credit rating agency S&P Global. Retail REIT returns averaged 18.4% in the fourth quarter, compared with the Dow Jones Equity All REIT Index’s 4.2% and the S&P 500’s 7.6%.

Owners of malls and open-air retail properties managed to increase value for their investors by boosting rents, leasing more space, offloading undesirable properties and cutting operating costs.

Among the Dow Jones U.S. Real Estate sector indexes, the regional mall index closed the fourth quarter of 2022 with the highest return, at 32.8%. Open-air retail properties performed well, too. The strip center index finished the fourth quarter with a 14.1% return. Compare that to the industrial REIT index’s 11% return, the hotel REIT index’s 6.3% return and the apartment REIT index’s 8% loss.

More REIT Reading

The Retail-to-Self-Storage-Conversion Trend

Developers are converting obsolete big-box and department stores into self-storage. The self-storage sector experienced robust growth in the third quarter of 2022, as asking rental rates rose by 11.7% year over year and construction starts increased 27% year over year, according to Cushman & Wakefield.

LaTerra Development has formed a joint venture with Fry’s Electronics to convert some of the defunct consumer electronics retailer’s empty stores into uses ranging from self-storage to RV and boat storage. At one former Fry’s — in Irving, Texas — the companies will spend $50 million to redevelop the box into a 191,000-square-foot self-storage complex with 46,000 square feet for boat and RV storage and 116,000 square feet of retail. Construction kicks off in the second half of 2023. Similar projects are underway at Fry’s boxes in Burbank and Sacramento, California.

Meanwhile, Inland Private Capital Corp. and Devon Self Storage Holdings recently completed their third self-storage conversion, in Allentown, Pennsylvania. The investment was made on behalf of Self-Storage Qualified Opportunity Fund, an Inland Private Capital-sponsored Qualified Opportunity Fund. Such funds invest in Opportunity Zone properties. The 91,787-square-foot facility was previously home to Kmart and was acquired in September 2021. Phase 1 of the completed conversion features 57,287 square feet of rentable, climate-controlled space served by an interior drive-thru. Phase 2, scheduled to be completed by April, will include 34,500 square feet of rentable space with exterior drive-up access. Upon completion, the property is expected to provide 769 drive-in and traditional drive-up units. The Allentown asset is one of 10 self-storage redevelopment projects being developed on behalf of Self-Storage Qualified Opportunity Fund. Inland Private Capital’s self-storage portfolio includes 173 properties across 29 states.

And Mustard Street Management recently purchased an empty, 197,000-square-foot Sears at Acadiana Mall in Lafayette, Louisiana, and plans to convert it into a self-storage property for partner Extra Space Storage to manage. It’s the eighth mall space Mustard Street Management is converting to self-storage. A store usually sits empty for five to seven years before its owners switch uses, said Mustard Street Management CEO Ted Filer.

More Conversions of Retail to Self-Storage

Deal Outlook: Trading Will Decrease in 2023, but the Sunbelt Will Be Hot

Most commercial property investors expect to seek deals in Sunbelt markets this year, according to CBRE’s 2023 U.S. Investor Intentions Survey.

4 Recent Sunbelt Deals

Austin: In November, Blackstone sold the 1 million-square-foot Southpark Meadows in South Austin in Texas to Big V Property Group. Walmart, JCPenney, Target and Hobby Lobby anchor the property. JLL represented the seller.

Raleigh and Durham: In September, ShopOne, Pantheon and an institutional investor bought Cary, North Carolina’s 40,000-square-foot Shoppes on the Parkway, anchored by The Fresh Market.

Miami: In December, a 16,285-square-foot, single-tenant retail property leased to Walgreens sold for $14.4 million. SRS National Net Lease Group represented the buyer in the 1031 exchange.

Dallas: In January, a family acquired an 11,620-square-foot retail property in Euless, Texas, for $8.7 million in a 1031 exchange. The building is an outparcel to a 194-acre mixed-use development. Tenants include Jersey Mike’s Subs and Total Men’s Primary Care. Faris Lee Investments represented the buyer, and Venture represented the seller.

What Retail Executives Fear in 2023

Labor issues and cutting costs without passing expenses on to consumers are key challenges retailers expect in 2023, according to two surveys.

KPMG polled 100 executives in December for its Retail Executives 2023 Outlook & Trends Analysis report. Seventy-three percent think the U.S. is already in a recession or will enter one in the next six months, up 32 percentage points from August. And 72% of those anticipate such a recession will last a year or less. That’s less optimistic than in August, when 81% believed so. Most respondents said inflation will be their chief challenge in 2023. Seventy-one percent will prioritize supply chain efficiency over the next 12 months, followed by improving customer experience and improving top-line growth.

Retail executives also plan to spend more to build their businesses in 2023, according to KPMG: 77% will increase their technology investments, 76% will raise their equipment investments and 63% will increase their warehouse and distribution investments.

In a poll of 50 retail executives, conducted in October, Deloitte found many retail chains’ concerns similarly are macroeconomic issues out of their control. Seven in 10 said labor was the No. 1 challenge heading into 2023. Six in 10 expected inflation to raise operating costs and questioned how long they can continue to raise prices on consumers.

Nearly eight in 10 executive of those surveyed for Deloitte’s report said their top growth opportunity in 2023 will be boosting and enhancing the omnichannel shopping experience and making it more seamless for consumers to visit stores, websites and mobile sites to shop and to return merchandise.