2022 Ended With Higher Occupancy, Rent Growth In ‘A Banner Year’ For Retail REITs

Shoppers are back, leasing is up, and despite a shaky economy, what one CEO called “mistakes” and several huge chains announcing widespread store closings, retail REITS posted results indicating they are besting their pre-pandemic performance.

“We enter 2023 with great momentum in our leasing pipelines, fueled by strong tenant demand as we continue to have success growing rents across our portfolio,” Regency Centers Corp. President and CEO Lisa Palmer said on a Feb. 10 earnings call in line with other Q4 results as U.S. retail vacancy reached its lowest level on record since 2007.

At the end of 2022, national retail vacancy stood at 5.7%, according to Cushman & Wakefield. The firm also found that rent increased steadily in Q4 2022 to an average of $22.99 per SF, while net absorption spiked to 10.9M SF, up from an average of 9.4M SF in Q2 and Q3.

Those conditions helped several REITs boost occupancy significantly, including Kimco Realty, which recorded its highest year-over-year increase of the past 15 years. 

Kimco leased 2.5M SF in Q4, bringing it to a total of 11.6M SF for 2022. Kimco, North America’s largest publicly traded owner and operator of grocery-anchored open-air shopping centers, has a 95.7% occupancy rate. 

“This represents a recovery of nearly 90% of the Covid inventory we experienced and only 70 basis points below our all-time high,” Kimco CEO Conor Flynn said during the Feb. 9 call.

Flynn called 2022 "a banner year," pointing to Q4's 152 new leases totaling 795K SF, exceeding the REIT's five-year average.

Like Kimco, Macerich saw an increase in occupancy across its portfolio of malls and shopping centers, recording year-end occupancy of 92.6%, up from 91.5% at the end of 2021.

"The quarter continued to reflect retailer demand that is at a level that we have not seen since before the Great Financial Crisis," Macerich CEO Thomas O'Hern said during the Feb. 7 call.

Macerich had a net income of $1.7M in Q4, though it wasn't enough to pull it out of the negative for all of 2022, as it recorded a net loss of $66M for the year. Chief Financial Officer Scott Kingsmore attributed some of the loss to an increase in interest expenses due to rising rates. 

Federal Realty Investment Trust's portfolio was 92.8% occupied and 94.5% leased at the end of Q4. CEO Donald Wood noted that certain brands help prop up revenues when others decline.

For instance, Trust TJX, which owns discount brands T.J. Maxx, Marshalls and HomeGoods, makes up 2.8% of Federal's rental stream, he said, while "troubled tenants" including Bed Bath & Beyond, Party City, Rite Aid and Tuesday Morning make up less than 1% of the 2023 forecast rental stream.

Federal Realty also saw some profits offset by higher interest rates, but the economic climate isn't impacting shoppers, he said — at least not yet.

"Now as economic activity falls and higher interest rates affect everything from car loans to mortgage payments to deal underwriting, we would certainly expect to see a slowdown in consumer spending, which very well may cause retailer reticence and a slowdown in the period," Wood said on a Feb. 8 call.

But, he added, "it hasn't happened so far."

Several REITs noted its tenants are benefitting from more in-person shopping, indicating they are clawing back market share from e-commerce. Macerich, for one, saw tenant sales rise 3% for the year, O’Hern said, adding tenants with smaller footprints fared best.

Average sales per square foot for tenants leasing less than 10K SF was $869, a 7% increase over 2021.

“We continue to see traffic at about 95% of pre-Covid levels, but tenant sales are exceeding pre-pandemic levels with year-to-date sales up 13% compared to the same period in 2019,” O'Hern said.

Regency Centers REIT, which specializes in grocery-anchored shopping centers, has also recovered to pre-pandemic leasing levels, said Alan Roth, executive vice president of national property operations and East Region president.

“We had an exceptional year in leasing, helping to drive strong occupancy gains with our leased rate up 80 basis points and our commenced rate up 110 basis points over levels one year ago,” Roth said during the call. “Notably, our year-end 2022 same-property lease rate is back to our 2019 level of 95.1%. But … we aim to ultimately get back closer to peak levels of 96% or higher.”

Regency Centers saw substantial improvement over 2021 in its 2022 net income as well, which rose from $361.4M to $482.9M. Its most active categories included restaurants, health and wellness, veterinary, grocers and off-price stores, Roth said.

Simon Property Group was in positive territory, too, reporting Q4 net income of $673.8M, compared to $503.2M in Q4 2021. It saw occupancy increase by 1.5% to 94.9% and rent per SF rise to $55.13, a 2.3% increase.  

Despite a solid showing, CEO David Simon admitted the shopping mall giant may have miscalculated after "an extraordinarily profitable" 2021.

"We did make the mistake of thinking '21 would repeat," he said. "And then obviously, you had a lot of volatility from a macro point in '22 with huge increases in interest rates, huge increase in price, in food and energy cost that the consumer was whipsawed, and we felt the impact of it." 

The REIT bought Forever21 and JCPenney out of bankruptcy through joint ventures with Brookfield and Authentic Brands Group in 2020. Both brands’ performances declined in 2022, which Simon attributed to poor planning. 

Simon shared plans to rectify those mistakes by leaning on the January 2022 hiring of a new CEO for Forever21 and putting more money into JCPenney. JCPenney is the anchor tenant at 54 of Simon’s shopping centers, making it the REIT's second-largest tenant by square footage. 

To keep occupancies high and rising, some REITs are distancing themselves from brands that could threaten them. 

“We need to closely monitor our tenant watchlist, anticipate changes and turn them into opportunities. Bed Bath & Beyond is a case in point,” Flynn said during Kimco’s call.

Kimco is reducing its exposure to the brand, which is teetering on the edge of bankruptcy and announced plans last year to close 150 locations. 

Kimco has six Bed Bath & Beyond stores that will close. In those locations, two leases are executed, two are ready for execution and the final two have active letter of intent negotiations, Flynn said. Since the beginning of the year, it has sold one shopping center with a Bed Bath & Beyond, cutting its portfolio of the stores to 25.

Despite some brands headed for trouble, retail is in a good position overall, Simon said. 

“I'm not saying it won't develop in the year,” Simon said. “But generally, there's not a lot of distress in retail right now.” 

Even so, several REITs, including Macerich, are redeveloping centers to offer more than just shopping leaning into the multifamily and office markets.

"Much of this work is mixed-use, diversification and densification," O'Hern said.

Macerich is developing a 110-unit luxury apartment complex at Kierland Commons in Scottsdale, Arizona, a 330-unit luxury multifamily project at FlatIron Crossing in Broomfield, Colorado, and a 10-story, 250K SF Class-A office tower at Biltmore Fashion Park in Phoenix, Arizona.