Retail Real Estate: Grocers are Good, Fashion is Bad

Ruth Saldanha: In the second part of our ongoing real estate series, we tackle retail real estate, which is shopping centers or malls. Now, the sector took a beating during the COVID-19 pandemic, but sentiment seems to be picking up again. Does it make sense to buy retail REITs right now? Is retail real estate a good investment? Brenda Lum, Managing Director of Credit Ratings at DBRS Morningstar is here today to talk about this.

Brenda, thank you so much for being here today.

Brenda Lum: Thank you for inviting me.

What Has Been Happening with Retail Real Estate Recently?

Saldanha: So, what's been going on with retail real estate since the COVID-19 pandemic?

Lum: There's been a lot. I would disaggregate retail into a couple of segments. One is grocery-anchored, one is fast fashion. And I think what we need to see the difference in the performance throughout the pandemic demonstrated that one has performed very strongly and the other one, not so much. So, when I look at grocery-anchored retail, things like grocery stores, maybe more necessity-based, banks, liquor stores, they continue to perform well during the pandemic because these are items that are household. Every day you need to consume. And so, as a result, people were actually going out to restaurants less because they were closed. So, grocery stores performed extremely well. And then, on top of that, stores that are around the grocery stores in the malls would also perform well because they get that foot traffic. So, that's the good side.

The not so good side were the, what I would call, fashion retail. And those performed poorly, one,

because they had to close down during the pandemic, but two, also there was a regrouping of spending. I think people were just concerned at the beginning of the pandemic, but subsequently, there has been explosion in terms of sales in retail. And those, I would say, malls that benefit the most are malls that have not just clothing or fast fashion, but other things to attract people, whether it's restaurants, whether there's different sources of entertainment, I think those are the strongest performers right now. And in terms of traffic, albeit traffic is slightly lower than what it was before the pandemic in these malls, these fashion malls, the actual sales per, I guess, walking traffic is higher, which is interesting because we're just trying to buy, buy, buy.

Risk Associated with Retail Real Estate

Saldanha: You've given us some interesting points, both on the good and the bad side. So, when you're talking about grocery-anchored estate as well as fast fashion, what are some of the risks in both segments that you're keeping an eye on right now?

Lum: Well, in terms of a grocery anchored, one of the risks is, will people reduce their consumption and purchases in these grocery-anchored retails? And therefore, maybe potentially, we've looked at this in the past, disintermediation with other forms, such as delivery services. So, people are not actually going to the grocery store to buy their items, but it turns out that people want to pick their produce. I don't think they're as happy when they're sitting back and letting someone else pick it and just have it delivered. I know I do, I'm not sure if you do, but I want to be able to see that I'm getting a good tomato or a good apple. And so, as a result, I think less to worry about on the grocery-anchored side.

I think on the fast fashion mall side, the concerns that we have are, one, some tenants that are weaker in performance, so that could impact the mall's performance. Also, are we at a state where we've just consumed so much that we're going to pull back? So, we're not going to buy as much fashion. We're not going to be visiting the malls as much. So, that's a wait and see right now. And I think the economy will have a big impact on that. Housing will have an impact because how much disposable income do you have? And if you're purchasing on credit cards, what's the credit card rate that you're being charged?

How to Consider Canadian Malls Right Now?

Saldanha: So, are any malls in Canada a good bet right now?

Lum: I really like the malls that have a uniqueness to them, like some type of an attraction. I like some of the largest malls that have best sales that have a lot of other things, like in Yorkdale Shopping Centre, for example, and Eaton Centre. So, those are malls I like because you can do so much there. Not just shop, you can eat, there are activities, and they also have events that attract people to come. And they're based in locations that have a population that's very dense. And it's drawing from people outside of that region because it is a tourist attraction, just because of their offerings, the different types of stores that they have that are unique, that you can't find anywhere else.

Which REITs Are a Good Idea Right Now?

Saldanha: Are there any REITs that you like right now for investors who want to go the REIT route?

Lum: I think in terms of REITs, one thing to look at is, I wouldn't suggest any specific ones, but those that are inclined to grow and to keep their distribution strong. So, some of the better-performing REITs in terms of actual rents and so forth would be industrial REITs, we like those. And then, additionally, I would say that probably because of the uncertainty right now with respect to going back to the office, working from home, that probably wait and see on the office REITs.

Saldanha: Great. We're going to talk about offices next. But thank you so much for being here today.

Lum: Well, thank you. Appreciate the time.

Saldanha: For Morningstar, I'm Ruth Saldanha.