Investors' distaste for retail real estate, heightened by the pandemic, may not be enough to eliminate it as one of real estate's four food groups for institutional investing, but it might become more of a substantial side dish than a main course.
COVID-19 and the ensuing recession are accelerating trends that are changing the makeup of most of the traditional real estate sectors and beefing up niche asset types, such as digital, that now are considered as only appetizers. In retail, grocery-anchored centers are expected to endure, while a greater number of malls are likely to be converted into multiuse properties with department store spaces turned into distribution centers or apartment complexes, industry executives say.
"They say when you are underwriting office, you are underwriting human behavior. It's the same for retail," said Pamela Boneham, Chicago-based managing director and head of capital strategies at Barings. "What will thrive and survive are grocery-anchored retail."
Barings manages $46 billion of real estate debt and equity. It manages retail real estate assets in excess of $1.2 billion.
Retail returns were the second lowest behind hospitality in the first quarter. According to the results of National Council of Real Estate Investment Fiduciaries' Property Index released in April, retail real estate returned -2.06% for the quarter ended March 31, down from 0.05% in the prior quarter. Retail's one-year return ended March 31 was -1.9%.
Institutional investors' actual allocations to retail real estate have been declining while industrial assets have been increasing over the past few years, said Greg MacKinnon, director of research at the Pension Real Estate Association, a global trade organization. The pandemic is accelerating the drop in retail properties in the U.S., he said.