Retail real estate still offers value for investors, StepStone research report finds

Retail real estate can still offer attractive returns, according to StepStone Real Estate’s Retail Real Estate: Clean Up in Aisle Six, or Heading to Chapter-7? report.

Despite a record number of store closings in 2017, the sector is not dead. Retailers are realizing the benefits of omni-channel operations, and some formerly online-only companies, such as Bonobos, Athleta, and Warby Parker, are opening physical retail locations.  Moreover, “trophy” malls are unlikely to lose much foot traffic in the near term due to their strong market demographics and merchant mixes.

However, the StepStone report recognizes that many retail locations will cease to exist in their current form. Malls in less desirable locations will be replaced by offices, medical facilities or multifamily housing. Others will be converted to warehouses and distribution centers, enabling e-commerce companies to reduce delivery times to consumers.

Despite the industry’s ongoing transformation, the StepStone report notes that retail has been the best-performing and least volatile sector among the primary property types over the past 20 years, according to the NCREIF Property Index. And while past returns do not guarantee future results, developments in the retail landscape over the last two years have yet to lead to significant changes in retail valuations or fundamentals, according to the report.

“While institutional investors should be cognizant about the potential value erosion that’s likely to occur at certain retail properties, we believe they should also opportunistically invest in assets that are well positioned to take advantage of today’s retail trends,” said Jeff Giller, partner and head of StepStone Real Estate. “The re-pricing in the industry will take time, so investors shouldn’t worry about the risk of being too late.”

To read the full report, please click here.