Are retail REITs a buy? 2021 data says so

When the COVID-19 epidemic hit American soil in 2020, many retailers were forced to close temporarily. This has dealt a severe blow to the sector.

But even after those restrictions were lifted, many consumers avoided in-store purchases and opted to shop online instead. This trend, in fact, has continued through 2021, even with the widespread availability of COVID-19 vaccines and boosters.

In light of this shift in consumer buying habits, many investors have been hesitant to add retail REITs to their portfolios – and understandably so. E-commerce posed a threat to brick-and-mortar retail before the pandemic began, but the events of 2020 have only exacerbated this situation. And over the past two years, many retailers have made the decision to close stores and divert resources to growing their business online.

Image source: Getty Images.

This makes the idea of ​​investing in malls less attractive. But new data shows physical retail has actually made a nice comeback in 2021. And that could make retail REITs a more viable prospect.

In-store spending jumped

Globally, in-store sales grew 8.2% in 2021 to more than $21 trillion, according to data from eMarketer. This is a higher number than what was spent in 2019. Meanwhile, total retail sales in North America grew by 15.2% in 2021 on a year-over-year basis.

Not only did in-store sales increase in 2021, but eMarketer expects this trend to continue in 2022. In fact, it predicts brick-and-mortar stores will see more new spending this year than e-commerce.

Investors should always proceed with caution

While this data paints a more encouraging picture for brick-and-mortar retail, the sector is not off the hook. Although health issues are no longer a barrier to in-store shopping, consumer habits can be hard to break. And since so many people are used to shopping online, they will likely continue to do so purely for convenience.

Additionally, many retailers are expressly focusing on ramping up their e-commerce sites and spending less money to renovate existing stores or open new ones. That alone is a sign that brick-and-mortar retail may be in a slow but steady decline.

The problem with mall properties in particular is compounded by the fact that department stores have been dropping like flies in recent years — and some of them predate the pandemic (hello, Sears). Since malls typically rely on department stores to serve as anchor tenants, losing them is a particularly heavy blow – one that could threaten the very existence of malls.

All told, the retail apocalypse may not be quite upon us. And based on the data above, there’s reason to believe that retail REITs could actually have a strong year.

But it is important to understand the risks involved before investing money in it. And investors looking to get into the world of retail REITs may want to stick with the big players in this space, such as a mall operator. Simon Real Estate Group (GPS 0.03% ).

Despite a difficult climate for physical retail, shares of Simon Property Group are actually up more than 18% from a year ago. And given its large portfolio of Class A properties, it’s a stronger bet for those looking to enter the commercial space.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging 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 wealthier.

About Timothy Cheatham

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