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Stock Strategist Industry Reports

E-Commerce Isn't the End for Retail REITs

Here's why mall and shopping center REITs should still expect solid growth.

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Traditional brick-and-mortar retail has come under pressure from the rapid growth of e-commerce as consumers shift an increasing amount of their buying online. The U.S. Census Bureau reports that e-commerce has grown at double-digit year-over-year rates for nearly every quarter since it began tracking digital sales in 1999. Focusing on the categories of retail sales that people generally buy online, e-commerce’s share is over 20%. However, the growth rate for e-commerce sales has followed a smooth, declining curve over time. Extending this curve out produces another five years of double-digit sales, but eventually the growth of e-commerce will converge with the growth of brick-and-mortar retail. Even though e-commerce’s market share will continue to climb, we believe 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.

However, we also believe that there is a significant bifurcation between high-quality and low-quality retail locations. Retailers want to place their stores in the best locations, even in a retail environment when retailers are closing stores. Many formerly online-only e-tailers are opening stores in the highest-quality locations. Meanwhile, struggling retail locations will face store closures, and increased vacancies will lead to lower sales for remaining tenants. While we expect store closures to dominate headlines, we think that the top retail locations should be mostly spared from the brick-and-mortar attrition. The retail real estate investment trusts 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 and sales growth and be less affected by store closures than lower-quality retail.

Kevin Brown does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.