Earnings Update: Retail REITs (Q1 2026)
Important Note:
I am spending this week at the REIT Week Conference in NYC, where I will be meeting with many REIT management teams. As a result, I may be a bit slower than usual to answer questions. Thank you for your patience. I expect to share exclusive insights from several REIT CEO interviews later this week. Stay tuned!
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Earnings Update: Retail REITs (Q1 2026)
This year, the market has vindicated our long-held conviction in brick-and-mortar retail.
While e-commerce continues to grow rapidly, the majority of retailers have found that an omnichannel strategy including both online and physical stores is optimal. Robust consumer spending at all kinds of stores and restaurants has kept retailer demand high, while supply growth has been extremely limited.
Despite the stagnant performance of apartments in recent years, multifamily and self-storage properties still trade at lower cap rates than shopping centers. Apartment and storage buildings can be densified vertically, while most shopping centers require lots of land (including for flat parking lots) and follow a horizontal design.
Thus, developers have continued to focus mostly on building apartments and storage facilities rather than shopping centers.
That situation is unlikely to change anytime soon, which makes existing shopping centers increasingly valuable.
Institutional investors have taken notice of the value proposition in this space.
Our favorite shopping center REIT over the last few years, Whitestone REIT (WSR), recently agreed to be acquired by Ares Management (ARES) for $19 per share -- significantly higher than the ~$15 per share offer previously entertained.
The Whitestone REIT story is a sweet success for us after a multi-year bear market for REITs.
But actually, all of our retail REITs are performing well this year, easily beating the broader real estate index (VNQ):
After years in which the market’s sole focus was direct beneficiaries of the AI revolution, there is now some broadening out to second-order and third-order beneficiaries.
The wealth effect from a surging stock market is fueling strong consumer spending, which is driving solid demand for space in shopping centers.
Note from this chart not just the 5%+ nominal retail sales growth but also the solid, ~1.5% YoY growth in real (inflation-adjusted) retail sales. This indicates that retailers are seeing real, volumetric growth in sales, not just higher prices.
That said, with national retail occupancy high at over 94%, rising asking rent rates caused some turnover in Q1. Net absorption dipped into negative territory, pushing occupancy slightly lower.
However, it is worth pointing out that the pandemic caused a shift in demand for retail space based on its location within a city layout.
Downtown retail used to be the prime location for retailers, exhibited by low vacancy rates, while suburban retail space held relatively less appeal. The pandemic caused that situation to reverse.
Increasingly over the last several years, suburban shopping centers have become the more popular location for retailers, while downtown space holds less appeal.
Hybrid work has led to workers spending more time in the suburbs and less time downtown. Retailers naturally want to be where consumers are.
Fortunately, aside from some urban mixed-use centers in Federal Realty’s (FRT) portfolio and some of Macerich’s (MAC) urban malls, our retail REITs are overwhelmingly focused on suburban shopping centers.
Also fortunate is the fact that the retail construction pipeline is extremely low (0.3% of existing supply) and still declining.
As long as demand remains steady, which we believe it will for the foreseeable future, pricing power should remain firmly in landlords’ favor.
With that, let’s get to the earnings updates for our four retail REITs:
