Super sale: I’m shopping for retail real estate
As supply of new properties has tightened and demand has grown, retail real estate has jumped to the top of Bill Maclay’s shopping list of appealing investments.
- Retail real estate, considered an unloved property type since the COVID-19 pandemic, has emerged from the back shelf to a front-of-store feature item for real estate investors, according to Fidelity Portfolio Manager Bill Maclay, who points to a much-improved environment driven by a more favorable supply-and-demand backdrop.
- “Investors’ concern about e-commerce displacing in-person shopping – a trend exacerbated by the pandemic – appears to have dissipated as the fundamental backdrop for retail real estate improved, with tighter supply and growing demand boosting property owners in the space,” explains Maclay, who manages Fidelity Advisor® Real Estate Income Fund.
- In helming the fund since 2019, Maclay invests across a range of commercial real estate securities, including common and preferred stock, corporate bonds and commercial mortgage-backed securities.
- He seeks to achieve what he considers a reasonable total return by combining real estate stocks and bonds, aiming for a higher yield and lower volatility than might be available through investing solely in real estate investment trust common stocks.
- With that goal in mind, Maclay has recently turned his attention to retail real estate, a category he finds newly attractive due to steadily tightening supply and the near absence of new retail center construction in the U.S. over the past 15 years.
- “After the Great Financial Crisis of 2007–2009, new construction of retail centers completely shut down,” he explains. “Today, new retail construction is lower than any other property type, while obsolete retail centers are being torn down, leading to dwindling supply of available retail real estate.”
- Meanwhile, the demand side of the equation also has shifted favorably, according to Maclay, as a growing population, rising consumer spending and a continued preference for in-person shopping have notably improved the landscape for retail property owners.
- He has observed that service providers such as gyms and medical practices – which are inherently less vulnerable to online competition – have been moving into retail locations, providing a new source of occupancy.
- Accordingly, retail rent has risen, he says, citing data from real estate research firm Green Street Advisors. Rent on renewals of expiring retail leases has increased by about 10%, leading to consistent, mid-single-digit net operating growth for retail property owners.
- Maclay claims he was quick to join the ranks of investors optimistic about the category. “I have built the fund’s exposure to the retail segment for the past year or so, with a combination of retail REIT equity, bond and preferred stock positions, as well as CMBS of retail properties,” he says.
- As examples, he cites the fund’s investments in Kimco Realty, one of the country’s largest strip center retailers, and a longtime holding in Acadia Realty Trust, an owner of “high (main trade) street” properties.
- “Both names are a good fit for the portfolio, as each represents a high-quality business with a strong property base and the potential to benefit from strengthening fundamental trends in the retail real estate industry,” Maclay concludes.
Securities mentioned were fund investments as of August 31.
Fidelity Advisor Real Estate Income Fund (FRIRX)
Seeks higher than average income. As a secondary objective, the fund also seeks capital growth.
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