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Stock Strategist Industry Reports

Retail REITS Still a Buying Opportunity

We think the market misunderstands the ramifications of e-commerce.

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Many investors are concerned that the continued growth of e-commerce is a large, structural negative trend for brick-and-mortar retail. However, we believe the omnichannel strategy--e-commerce sales by traditional retailers--that is being increasingly pursued by most national retailers favors the high-quality portfolios owned by the retail real estate investment trusts. Of these, Simon Property Group (SPG) and Regency Centers (REG) are our top picks.

The retail REITs typically trade off on major retailers announcing store closures or reports of large e-commerce gains; the implication is that gains by e-commerce will negatively affect future sales and thus occupancy of the retail REITs. While many retailers are indeed closing stores, these are typically at lower-quality malls and shopping centers, which lack the demographics like population density that generate high foot traffic or average household income to lead to high average sales per ticket for tenants at the center. Stores in lower-quality properties are likely to be less profitable and therefore more likely to be targeted for closure when a retailer decides to reduce its physical footprint. A store closure at one of these centers can be devastating, as each closure draws fewer consumers to the other stores, which in turn lowers sales and increases the likelihood of additional store closures at the center. Given this relationship, many investors assume that consumers shifting sales online will only have a negative impact on the retail REITs.

Kevin Brown does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.