- Major retail REITs, including Simon Property Group and Kimco Realty, raised their funds from operations (FFO) projections after a robust 1H24.
- Retail vacancy rates hit a 20-year low in 2Q24, driving rent gains and strong leasing activity.
- Grocery-anchored leases continue to be a significant driver of growth for retail REITs.
Retail REITs are raising their financial outlook for the remainder of 2024, thanks to a strong first half marked by robust leasing activity, high occupancy rates, and steady rent growth, as reported in Bisnow.
Reason for Optimism
Despite broader economic challenges like persistently high inflation and interest rates, demand for retail space is strong, according to Q2 earnings calls.
Publicly traded REITs, including Simon Property Group (SPG), Kimco Realty (KIM), Brixmor Property Group (BRX), Regency Centers (REG), Federal Realty Investment Trust (FRT), and NNN REIT (NNN), all raised their projected funds from operations (FFO) for the year.
This upward revision reflects the tight retail market, where vacancy rates hit a two-decade low of 5.3% in Q2, per Cushman & Wakefield data. The average asking rent also rose 3.8% YoY to $24.37 PSF.
Retail REITs Outperform
The increased projections have helped retail REITs outperform the broader stock market, which saw significant losses recently.
While the S&P 500 dropped 6.1% over a recent five-day period, retail REITs either posted gains or fell less sharply. For example, Regency Centers’ stock rose by 2.6%, while NNN REIT was up 3%.
Grown Driven by Occupancy
The rise in FFO projections was largely thanks to high occupancy rates, quick lease-ups, and the ability to raise rents on turnover and renewals.
For example, Kimco Realty reported securing rent increases of 26% on new leases and 9% on renewals, leading the company to boost its FFO guidance to $1.60 to $1.62 per diluted share.
Similarly, Brixmor Property Group raised its FFO outlook after executing 1.3 MSF of new leases and renewals, achieving record occupancy and rent growth. The company’s CEO, James Taylor, highlighted the favorable supply-demand environment.
Grocery-Anchored Retail Leads
The grocery sector also continues to be a strong performer for retail REITs. Regency Centers, for instance, reported that six of its top signed but unopened leases are grocery stores. Kimco Realty also noted the ongoing ‘accelerating’ demand for grocery-anchored leases.
In other news, Federal Realty Investment Trust landed a new Whole Foods at its Huntington Shopping Center on Long Island, while Brixmor added a Sprouts Farmers Market in Knoxville, TN, nearly tripling the rent of the previous tenant.
Challenges and Opportunities
Even with such strong performance, retail REITs face challenges, including tenant bankruptcies and limited new supply.
Brixmor, for instance, is working to replace several Conn’s HomePlus stores after the retailer announced closures. However, the company is confident in its ability to backfill these spaces with better tenants at higher rents.
As the year progresses, retail REITs will continue to navigate these challenges while capitalizing on the strong demand for retail space, particularly in the grocery sector. The upward revisions in FFO guidance across the industry signal a positive outlook for the remainder of 2024.
