Experts: Shopping Centers An Attractive Contrarian Play

There might be a sense of gloom clinging to the retail real estate sector, but the fundamentals of the U.S. economy say it is unwarranted, according to retail experts who recently held a webinar for investment specialist Marcus & Millichap.

Marcus & Millichap Senior Vice President of Research Services John Chang said retail is actually in a transition period.

"A lot of stores were caught flat-footed [by e-commerce], they didn't adapt well, and we've seen some of them fall by the wayside because they didn't adapt ..." Chang said. "At the same time, it's actually a very exciting time to invest in retail product."

That is because the perception is that things are worse than they really are, Chang said.

"Just think where we are economically," he said. Economic fundamentals continue to support retail sales growth — online and physical stores.

"We've had the longest spin of job creation in history ... retail sales have grown at a steady pace, well ahead of the long-term average, and we're seeing wage growth," Chang said.

Retail now can be a shrewd contrarian play. Investors, Chang said, can generate a much stronger yield in the sector because they have far less competition bidding on retail assets.

Festival Cos. Chairman and President Mark Schurgin, who is a retail developer, said high-end retailers and discounters are doing extremely well, though the middle is squeezed.

"Amazon is actually only 4% of all retail sales," Schurgin said. "Millennials love shopping. They love going to retail stores."

Also helping retail: brands' aggressive moves into omnichannel retailing.

Restaurants are big drivers for retail properties as well, Schurgin said, though that trend might eventually slow down. "There's still tremendous demand. There will be saturation in a few years, because you can only go out to eat so many times."

Retail real estate is also gaining validation from digitally native brands, according to Green Street Advisors retail analyst Spenser Allaway, speaking separately at a NAREIT conference.

Including digitally native brands is a way for retail properties to improve themselves, aside from the overall look and feel of a shopping center.

"Not only are we seeing the overall narrative begin to improve, but we’re also seeing actual validation — by way of these digitally native brands — for the relevance of higher-end retail real estate,” Allaway said.