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Think Malls Are Dead? Not So Fast

With the malaise in brick-and-mortar commerce, picky institutional investors may find commercial real estate opportunities in high-quality malls, a new report shows.

Traditional retailers are under extreme pressure from e-commerce, but resilient and high-quality stores and malls that have already adjusted to some of these pressures may provide some relative value for institutional investors, according to a report to be released this week.

Kenneth Riggs, president of real estate research firm Situs, which provides valuations on private commercial real estate holdings for institutional investors, says the uncertain outlook for retail, including store closings and bankruptcies, is the reason for the limited number of properties currently being bought and sold in the sector. But “it’s overdone in terms of investors solely pointing to technology as the cause,” he says. “Retail has always been a Darwinian environment. Walmart had five stores in the 1960s, then they destroyed downtowns over the next few decades.”

Riggs says institutional investors need to sift through retail opportunities to determine which properties have incorporated technology in a creative way and have added amenities such as restaurants and other experiences for shoppers. According to the third-quarter 2017 Situs report on commercial real estate, there are many technology applications that can improve a store’s prospects, including data analytic tools that can monitor consumer’s traffic patterns in a store to help operators redesign poor layouts and improve products.

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The report also found that there are extremes in retail real estate markets. So-called Class B and Class C malls are being abandoned.

“However, the U.S. retail market was vastly overbuilt and the shedding of stores merely reflects a natural cyclical shift for retail commercial real estate,” according to the report.

On the other hand, neighborhood and community retail centers that are anchored by grocery stores are doing well.

Investors are becoming more cautious about real estate in general, which has been rising steadily since its lows after the financial crisis. Investors are moving into categories such as industrial real estate, which is still in high demand as e-commerce retailers seek out fulfillment and logistics centers. There is huge demand from foreign and domestic investors for high quality properties in hot markets, according to the report.

“This has driven up prices for many property types well above their pre-recession peaks,” the report said. “As prices continue to soar, investors have become skittish about when the correction will occur and how large it will be.”

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