Coming Off A Solid 2021, Retail Landlords Aren’t Done Shopping Solutions For A Post-Pandemic Reality

Major retail landlords were in a celebratory mood in early February as they reported strong metrics in 2021, including better occupancies, higher rents and a return to development after the slog that was 2020. 

Even so, they're not getting comfortable. 

Earnings from the past quarter and year represent a bounce back from the worst period of the coronavirus pandemic, though not quite a return to pre-pandemic levels, while overall shopping patterns remain altered, perhaps permanently. 

Retail landlords are assuring investors that they're making changes to set their properties up for success in a post-pandemic environment, such as increased investment in mixed-use redevelopments and diversification of tenant rosters. 

"Obviously, there's a lot of volatility in the world today, and we're not immune to that. But we are building off a terrific, terrific '21," Simon Properties CEO David Simon said during his company's Q4 2021 earnings call last week.

Simon, the nation's largest mall owner with 191M SF of retail and mixed-use space, generated nearly $4.5B in funds from operations in 2021, its best total ever.

Kimco Realty, meanwhile, saw a nearly 13% jump in its same-property net operating income during the fourth quarter, with "grocery-anchored centers and mixed-use assets in growing markets resulting in solid occupancy gains and growth in FFO," CEO Conor Flynn said in a statement. 

In an earnings call, Flynn said the company's resiliency "is a key reason why we have been successful in re-leasing pandemic-induced vacancies, while simultaneously attracting ... operators that have embraced the future of last-mile omnichannel retail." Kimco's portfolio includes 94M SF of retail space.

Rethinking retail space to include less-traditional tenants, or uses, is a pre-pandemic trend that's only accelerated over the past two years, landlords note. 

Simon completed five significant redevelopments last year, adding what it calls "densification components" to some of them. This includes the reimagined Northgate Station mall in Seattle, a project that's been well underway for several years and now includes two hotels and an NHL headquarters and practice facility.

Simon has also partnered with Nobu Hotels to create a Nobu Hotel & Restaurant as a new component of its Phipps Plaza mall in Atlanta, as well as a "unique, curated dining experience," a 90K SF Life Time Athletic facility and a 12-story office building. Construction on the project is slated to wrap this year. 

David Simon said the company has a strong development pipeline once again and expects it will add to its number of properties this year, with a focus on mixed-use assets. 

"I'd be disappointed if [our portfolio] didn't grow in size and stature and mostly in mixed-use ... I would still say that's the No. 1 priority," Simon said.

The company may even diversify into sectors outside of retail, the CEO said. 

"I think we're going to build another platform," he said. "It's not necessarily a retail platform, but we're in the midst of kind of working through some opportunities."

Simon isn't the only major mall owner bullish on mixed-use redevelopments. 

Federal Realty CEO Don Wood touted its CocoWalk mixed-use project, a redevelopment of a South Florida mall that dates back to the early 1990s. Federal Realty, Grass River Property and the Comras Co. headed up the transformation that added a new five-story, Class-A office building, a vibrant open-air plaza and new food and beverage options. 

"Citi will be hosting a tour of our newly completed CocoWalk mixed-use project during their conference in South Florida next month," Wood said during the company's earnings call last week, when the company reported a 16.2% revenue bump in the fourth quarter. "It’s created over $60M in value on our $200M investment and we would love to see a wide variety of investments there."

Kimco, which saw a nearly 58% revenue increase during the fourth quarter, is turning to grocery stores as a means to bring more shoppers to retail properties. 

"When we started [our] strategy over five years ago, it was nearly a 50/50 split of our annual base rent coming from our grocery-anchored shopping centers versus our non-grocer. Today, 80% of our annual base rent comes from shopping centers that have a grocer," Flynn said.

It's not the only firm making the change. 

Macerich recently signed its first lease with Lidl, a 30K SF grocer from Germany with 11,000 stores worldwide. The company, a main competitor to Aldi, will open at the Macerich's Freehold Raceway Mall in summer 2023.

"We look forward to further scaling our business [with Lidl]," Macerich Senior Executive Vice President, Leasing Doug Healey said.

On the whole, Macerich continues "to see very significant and accelerating retailer and mixed-use demand," CEO Tom O'Hern said during his company's earnings call. Macerich, which owns about 50M SF of retail space, saw revenues jump 18% during the fourth quarter. 

Such demand facilitated at least one disposition by Macerich. In 2021, the company sold the 1.2M SF shopping center Paradise Valley in Phoenix for $126.5M. The buyer, RED Development, plans to convert the 1.2M traditional shopping mall into a massive mixed-use complex with retail, office, multifamily, grocery and even self-storage components. Macerich is expected to retain a 5% interest in the project, to be delivered in phases.

Though developers are getting creative in the uses that go into mall redevelopments, "retail almost always factors into the planning of a mixed-use property," Participant Capital Advisors President Bernard Wasserman said. Participant is a real estate investment management firm that specializes in mixed-use developments.

Creating an ideal mix of easily accessible services and traditional retail is a trend furthered by the pandemic, Wasserman said, which not only accelerated online shopping but also brought greater acceptance of a work-from-home dynamic.

"We expect those changes to remain long after concerns over Covid subside," he said. 

Remote work trends have bolstered demand for nearby retail options, especially those that supplement traditional amenity offerings in multifamily buildings, said Lendlease Executive General Manager of Development Ted Weldon, who is based in the company's Chicago office.

"That said, with more people working from home, on-site retail and restaurants are likely a bigger part of daily routines, saving residents time and money by bringing meals and other goods closer to home," Weldon said. "The right mix of retail and other public amenities can create a nexus for the local community."

The transformation of retail has been in motion since long before the pandemic, said Denz Ibrahim, head of retail and futuring at LGIM Real Assets, a division of Legal & General Investment Management, which manages $2T in assets globally.

"The way that customers are choosing to shop has undergone a seismic cultural shift — they want to be part of new experiences, creating memories that are impossible to replicate online," Ibrahim said. 

Traditional department stores are falling out of vogue, and are not enough to draw shoppers to malls, Ibrahim said. 

"Customers need to have multiple reasons to visit."

Integration between online and physical stores is one such reason, as retailers embrace consumer choice and technology, according to Deborah Jackson, senior managing director of valuation consulting at Cushman & Wakefield.  

"While retail evolution has been accelerated by the pandemic, the current resurgence is driven by the reinvention of the shopping experience," Jackson said.

In Southern California, development firm Caruso has partnered with Amazon at several retail properties in a move to provide this integration. The company's Americana at Brand mall in Glendale will serve as host to the first Amazon clothing store, to open later this year. 

"If you think about a lot of the retailers, they're looking at the store today as a main distribution point," Kimco Chief Financial Officer Glenn Cohen said during the earnings call. "They are delivering that product from the store ... So if you put all that together, when you have an asset that is surrounded by just general housing, it is just much easier for [shoppers] to get their product quicker."

The addition of grocery stores and other nontraditional mall tenants will help buoy the retail sector in its next act, experts say. 

"The leasing interest we're seeing comes from a wide range of categories, including health and fitness, food and beverage, entertainment, sports [and] coworking," O'Hern said. "All those categories are at interest levels we've never seen before."

Healthcare is one such example of an up-and-coming part of retail landlord strategy, Vantage Commercial Director of Healthcare Services Emily Stein said.

"Before the pandemic, medical and dental offices were interested in the retail sector because of increased visibility, and typically more parking," Stein said. "There are also sometimes synergies with the other tenants in retail centers, and lower rents compared with medical office buildings."

As retail spaces opened up during the pandemic, doctors and dentists took advantage of vacancies, Stein said. 

"Medical tenants have a default rate of less than 3%," Stein said. "And so not only are landlords getting tenants that don't go out of business, but they are also tenants that typically put a lot of money into their suites and spaces."

These tenants have a place in mixed-use redevelopments, Stein said. 

"Categories for new deals include grocers, discount apparel, sporting goods, home furnishings and healthcare," Federal Realty Chief Financial Office Dan Guglielmone said during the earnings call.

The outlook for retail is mirrored by investor interest in retail REIT stocks, which have bounced back in the last year, though valuations have yet to recover from the mid-2010s, when online sales accelerated and some forms of retail, such as department stores, lost favor. 

Simon stock is up more than 30% over the past year. Over the past five years, the company's stock is down more than 20%. Macerich, similarly, is up more than 30% year-over-year, but it is down almost 50% from five years ago.

Federal Realty and Kimco have seen similar stock trends.

It's looking up, with retail fundamentals supporting recovery. Last month, the Bureau of Labor Statistics reported that retail sales in December 2021 were up nearly 17% over December 2020; and the latest Mastercard SpendingPulse report found retail sales were up 7.2% in January compared with a year earlier.

There are further signs of optimism within the major REITs Q4 earnings, with occupancy levels surging year-over-year for all four companies.