FFO guidance after the coronavirus began to spread throughthe US.
Still, it is hard not to see the case for grocery stores right nowand extrapolate that to the sector’s landlords. Spending at grocerystores has increased since the coronavirus took hold in the US, asthe nation sheltered in place and ceased going to restaurants,according to research firm Alexander Babbage.
Historically, grocery-anchored retail has been a good defensiveplay. “Through strong and weak economic cycles, the neighborhood grocery-anchored shopping center has been a favored retailproperty class for lenders who recognize that the grocery-anchoris a significant draw to customers that frequent the service businesses that typically are tenants in the side shops and provide cashflow stability to the center,” says Gary Tenzer, co-founding principal at George Smith Partners.
Tenzer also says that grocery-stores’ everyday familiarity is in itsfavor during this tumultuous time. “With the prospect of beinghome bound for extended periods and the fear of stock-outs, manyhave rediscovered the grocery store anchoring the neighborhoodshopping center after finding that online sources were unreliableand mob scenes at the warehouse club,” he says.
It is also important to note that not all of retail REITs are pureplays. Recognizing the struggles of retail over the years, many haveshifted strategies to include a mixed-use component, hoping toprovide some balance as retail remains beleaguered by COVID- 19.
When Seritage began to replace Sears stores with propertiessuch as dining, shopping and entertainment, it also expanded tonew asset classes, according to Bry.
“[We] have made significant progress transforming these prop-
erties into first-class, multi-tenant shopping destinations, and
have now launched a series of multifamily and mixed-use projects
across roughly three dozen sites,” he says. “These redevelopments
have been highly effective at driving income diversification and
A REIT’s heft will also aid in navigating this unusual time,
another reason why Simon Property Trust is favored to come out, if
not as a winner, then at least intact from this crisis. “They have the
best balance sheet in industry,” says Richard LaTella, executive
managing director and the retail practice group leader for
Cushman & Wakefield’s valuation & advisory group. “They are the
500-pound gorilla in the room and a very well run machine.”
Simon is poised to get much bigger per its pending $3.6-billion
acquisition of Taubman Center, which it revealed in February. At the
time, the move was hailed as brilliant. “Simon Property Group bid sug-
gests there is significant upside in US malls,” Chris Needham, princi-
pal at Gaspee Real Estate Partners said when the deal was announced.
Since the start of the coronavirus, investors have been wondering about the fate of the deal, to say nothing of its wisdom. In aresearch note, Mizuho Securities USA speculated that Simonwould be unlikely to exit the agreement using its “materialadverse effects” clause despite the pandemic, reasoning thatSimon would have to show that the pandemic has had a “disproportionate impact” on Taubman compared to its peers.
Yet Taubman Centers made headlines in late March when itwarned tenants that it expected its April rent to be paid on time. Inall likelihood, the REIT was probably met with requests `for extensions and forbearance that would drag on its cash flows.
In the long run, post-coronavirus, the original driver for the
Taubman acquisition could well materialize. Many saw it as an
opportunity for Simon Property Group to gain stronger footing
in a quickly changing marketplace, according to Aleida Martinez-
Molina, a bankruptcy and insolvency attorney at Weiss Serota
Helfman Cole & Bierman. “The nation’s largest mall operator
may be positioned to facilitate the transition of traditional malls
from almost exclusive retail shopping venues to places with more
‘experience/entertainment’ tenants,” she said.
It is difficult at this point to see how the coronavirus reshapes
consumers’ shopping habits but it does bear mentioning that
before the coronavirus, retail was well on its way to reinventing
itself as an experience-based destination for shoppers. There is a
school of thought that, once it is safe to emerge, consumers will be
desperate to get outside and spend money.
“Entertainment-oriented retail keeps spaces fresh and getspeople in the malls to stay longer and spend money,” La Tella says.
At this point it is hard to imagine that happening again. ButREITs have learned to play the long game and adapt when necessary—skills they will need as they ride out this crisis. —Additionalreporting by Erika Morphy. ◆
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1 Marcus & Millichap
3 Yardi Systems INC
5 Yardi Systems INC
13 CIBC World Markets
19 Walker & Dunlop LLC
25 Hines Advisors Limited Partner
27 Capital One Services, LLC
C4 FIDELITY NATIONAL TITLE GROUP