Are Shopping Centre REITs Dying?

Are shopping centre REITs, like Smart REIT (TSX:SRU.UN), at risk with the rise of e-commerce?

| More on:
shopping mall, retail

Many investors are fearful of shopping centre REITs because they believe brick-and-mortar stores will soon be a relic of the past. The rise of e-commerce has slowed sales at physical stores, but does that mean shopping centre REITs are a risky play?

In a piece titled “Are We Witnessing the Death of Retail?”, Fool.ca contributor Matt Smith said he believes that brick-and-mortar retailers are facing a considerable amount of pressure, which is expected to increase over the next few years as more companies transition to e-commerce platforms.

Mr. Smith stated that analysts are predicting that e-commerce sales will jump by 40% between now and 2019. This will definitely come at the expense of brick-and-mortar retail stores, but will this mean many vacancies in shopping centres over the next few years?

Consider Smart REIT (TSX:SRU.UN), a well-run shopping centre REIT that owns approximately 31.5 million square feet worth of leasable space and has 3,100 tenants. The company has 108 Wal-Mart Stores, Inc. (NYSE:WMT) anchored shopping centres.

Wal-Mart stores are a huge driver of traffic, but even Wal-Mart is experiencing the pressure lately thanks to the rising threat of e-commerce. However, I don’t think Wal-Mart is going to shut down stores across the country anytime soon.

Most of Smart REIT’s tenants are resilient companies that are likely to stay in business over the next decade and beyond, even with the pressure brought forth by the rise of e-commerce. Such resilient stores include grocery stores, hardware stores, drugstores, fast-food restaurants, banks, health clubs, dollar stores, and movie theatres.

These kinds of businesses aren’t going anywhere soon, even if e-commerce continues its impressive rise. Businesses like Canadian Tire Corporation Limited or Cineplex Inc. require physical locations, and the rise of e-commerce isn’t really a threat.

There are some other types of stores which may be vulnerable to the rise of e-commerce. These susceptible companies could potentially close stores sometime over the next decade. Such companies include fashion retail, health food, office supply, and electronic stores. The stocks of many of these businesses are struggling right now, so it’s important to consider the risks associated with these tenants (think stores like Staples Inc. or Sears Canada Inc.; both are having difficulty thriving in the current retail environment).

It’s important to consider the type of stores that are the tenants of the shopping centre REITs. Are they businesses that are struggling because of rising e-commerce pressures? Or are the businesses thriving regardless of what’s happening in the e-commerce world?

In the case of Smart REIT, a majority of its tenants are businesses that are unlikely to lose huge amounts of business to e-commerce platforms, so I think it is one of the smarter shopping centre REIT plays out there. The downfall of brick-and-mortar retail stores is real, but that doesn’t mean you should scratch shopping centre REITs off your radar.

Stay smart. Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any stocks mentioned.

More on Investing

ETF stands for Exchange Traded Fund
Investing

2 High-Yield Dividend ETFs to Buy to Generate Passive Income

Both of these Hamilton ETFs sport double-digit yields with monthly payouts.

Read more »

engineer at wind farm
Energy Stocks

1 Canadian Utility Stock to Buy for Big Total Returns

Let's dive into why Fortis (TSX:FTS) remains a top utility stock long-term investors may want to consider right now.

Read more »

man in suit looks at a computer with an anxious expression
Tech Stocks

Short-Selling on the TSX: The Stocks Investors Are Betting Against

High-risk investors engage in short-selling, betting against some TSX stocks for bigger profits.

Read more »

woman retiree on computer
Dividend Stocks

1 Reliable Dividend Stock for the Ultimate Retirement Income Stream

This TSX stock has given investors a dividend increase every year for decades.

Read more »

A glass jar resting on its side with Canadian banknotes and change inside.
Stocks for Beginners

How to Grow Your TFSA Well Past the Average

Need to catch up quick with your TFSA? Consider some regular contributions to this top bank stock, as well as…

Read more »

dividend growth for passive income
Investing

Key Canadian Stocks for a Wealth-Building 2025

These three Canadian stocks could outperform next year, given their solid underlying businesses and healthy growth prospects.

Read more »

Tractor spraying a field of wheat
Metals and Mining Stocks

Where Will Nutrien Stock Be in 1 Year?

Nutrien stock has had a rough few years, and this next year may not be easy. But long-term investors may…

Read more »

Canadian dollars in a magnifying glass
Energy Stocks

The Smartest Energy Stocks to Buy With $200 Right Now

The market is full of great growth and income stocks. Here's a look at two of the smartest energy stocks…

Read more »