Will Brick-and-Mortar Weather the E-Commerce Storm?

Kevin Brown: Traditional brick-and-mortar retail has come under pressure from the rapid growth of e-commerce as consumers shift an increasing number of their buying habits online. E-commerce has grown at double-digit year-over-year rates for nearly every quarter since 1999. When we focus on the categories of retail sales that people generally buy online, e-commerce's share is now over 20%.

While we recognize the pressure that e-commerce growth places on traditional brick-and-mortar retail, we believe that physical retail is not going out of business. The growth rate of e-commerce has followed a smooth, declining curve over time. Extending this curve out produces another half decade of double-digit sales growth, but eventually the growth of e-commerce will converge with the growth of brick-and-mortar retail. We believe that e-commerce's market share will continue to climb, but that brick-and-mortar retail's portion will remain large enough to sustain positive sales growth over time, as it has the previous nine years.

The retail REITs that we cover have all built portfolios with high-quality retail assets that should produce continued, solid growth. The Class A properties owned by these REITs should see higher foot traffic, higher sales growth, and be less impacted by store closures than lower-quality traditional brick-and-mortar retail. Additionally, the long-term leases signed with tenants should protect the REITs from any short-term disruption. We think all the retail REITs in our coverage are currently undervalued and provide attractive dividend yields, with Class A mall REIT Macerich being our top current pick. These companies should weather the e-commerce storm and prove to be winners over time, so we believe that investors should consider adding to their portfolio the high-end retail REITs.