October 10, 2017 glacierinvest

The narrative for physical retail has not been favorable over the past few years. The internet, Amazon in particular, is basically portrayed as the Nothing from “The Neverending Story”. An all-consuming force that appears unstoppable whose ultimate destiny is to end the world as we know it.

I have a bit of a different perspective. Internet retail is clearly a force to be reckoned with but the demise of the physical store is not imminent, at least not for some retailers. I believe the internet is a major contributing force to the disruption in the retail space. However, I also believe retailer specific problems have contributed too.

Take department stores and off-price retailers for example. Department stores are the quintessential large, lumbering behemoth that has been slow to adapt to environmental changes while off-price retailers have flourished, whether by plan or by chance. Regardless, off-price retailer fundamentals and growth have outpaced department stores and retail in general over the past several years.

It appears the stock performance of the owners of the underlying retail real estate might be starting to reflect the fundamental disparity between department stores, off-price retailers and the retail industry as a whole as well. Mall REITs tend to own enclosed malls with department store anchors while Strip Center REITs tend to own open-air shopping centers with grocer, off-price retailer and home improvement retailer anchors.

Strip Center REITs have their own set of challenges but may just be the better retail REIT option until greater clarity into the mall retailer saga is obtained.