NEW YORK CITY—It's a time of evolution in retail, yet early-stage evolution should not be confused with end-stage disease for the sector. “Doomsday scenarios cited in news coverage are extrapolated to the entire industry, rather than to the vulnerable segments which are truly struggling,” says Melissa Reagen, Americas research head at TH Real Estate. “In our view, the average-to low-performing retail centers are seeing value declines, while there is no evidence of the same for high-performing malls and shopping centers.”

Moreover, a new report from TH Real Estate doesn't anticipate value declines occurring for these better-positioned retail centers, either, “as long as the operating performance of these properties continues to be strong and owners are able to access the debt markets.” Reagen says the firm sees “compelling buying opportunities for high-performing power centers, lifestyle centers, neighborhood/ community centers, grocery-anchored centers and malls.” High-performing retail assets are characterized by “a strong experiential component, continual adaptions that complement e-commerce, and strategic, forward-looking capital improvements that address shifts in consumer behavior and adapt to current technology.”

Accordingly, TH Real Estate's report says the firms expects these high-performing properties to thrive in the coming decades, “while average and low-performing retail centers will die a slow death or be repurposed. Rising online retail sales have been one of the catalysts behind the shuttering of mediocre retailers and shopping centers, however it has also provided retailers with greater operating efficiency and the ability to offer a more curated, personalized shopping experience.”

And while reports of large-scale store closings and faltering operators filing for bankruptcy cast a pall over retail generally, TH Real Estate notes that class A and A-plus malls and four- and five-star shopping centers are outperforming average and low-performing retail centers in terms of occupancy, sales productivity and rental rates. Citing data from General Growth Properties, the report notes that A-rated malls experience 1.5 times more traffic than class B properties and almost 2.5 times more traffic than C-rated malls.

“Data from the NCREIF Property Index (NPI), which serves as a proxy for high-performing institutional-quality retail properties, suggests that retail operating fundamentals have been solid during this most recent cycle,” the report states. Vacancy rates for retail properties in the NPI have fallen more than 350 basis points since 2010, and stood at 7.4% as of the second quarter. On average, NOI has grown around 3.5% annually since 2010 for retail properties in the NPI, similar to the growth seen for offices and warehouse properties during the same time period.

This growth continues even as e-commerce claims an increasing share of retail sales. Yet the report notes that while “the convenience and ease of online shopping is undeniable,” it cannot replicate the experience of shopping in a physical store. “Ultimately, online will make retailers more efficient, but it will require substantial investment to create a seamless, interactive in-store experience that resonates with consumers,” the report states.

Increasingly, that in-store experience is, well, an experience rather than simply buying things. “Consumers of all ages, not just millennials, are spending more on experiences and less on material goods,” according to TH Real Estate. “Among all consumer spending categories, Mintel expects spending on experiences, such as dining out and vacations, to grow the fastest during the next five years.”

This change in consumer preferences is reflected in a changing mix of tenants and uses at the nation's top malls and shopping centers. TH Real Estate cites GGP data showing that entertainment and food accounted for 40% of the REIT's leasing activity in 2017, compared with 24% in 2013. The proportions were roughly reversed for apparel's share of this year's leasing compared to four years ago.

NEW YORK CITY—It's a time of evolution in retail, yet early-stage evolution should not be confused with end-stage disease for the sector. “Doomsday scenarios cited in news coverage are extrapolated to the entire industry, rather than to the vulnerable segments which are truly struggling,” says Melissa Reagen, Americas research head at TH Real Estate. “In our view, the average-to low-performing retail centers are seeing value declines, while there is no evidence of the same for high-performing malls and shopping centers.”

Moreover, a new report from TH Real Estate doesn't anticipate value declines occurring for these better-positioned retail centers, either, “as long as the operating performance of these properties continues to be strong and owners are able to access the debt markets.” Reagen says the firm sees “compelling buying opportunities for high-performing power centers, lifestyle centers, neighborhood/ community centers, grocery-anchored centers and malls.” High-performing retail assets are characterized by “a strong experiential component, continual adaptions that complement e-commerce, and strategic, forward-looking capital improvements that address shifts in consumer behavior and adapt to current technology.”

Accordingly, TH Real Estate's report says the firms expects these high-performing properties to thrive in the coming decades, “while average and low-performing retail centers will die a slow death or be repurposed. Rising online retail sales have been one of the catalysts behind the shuttering of mediocre retailers and shopping centers, however it has also provided retailers with greater operating efficiency and the ability to offer a more curated, personalized shopping experience.”

And while reports of large-scale store closings and faltering operators filing for bankruptcy cast a pall over retail generally, TH Real Estate notes that class A and A-plus malls and four- and five-star shopping centers are outperforming average and low-performing retail centers in terms of occupancy, sales productivity and rental rates. Citing data from General Growth Properties, the report notes that A-rated malls experience 1.5 times more traffic than class B properties and almost 2.5 times more traffic than C-rated malls.

“Data from the NCREIF Property Index (NPI), which serves as a proxy for high-performing institutional-quality retail properties, suggests that retail operating fundamentals have been solid during this most recent cycle,” the report states. Vacancy rates for retail properties in the NPI have fallen more than 350 basis points since 2010, and stood at 7.4% as of the second quarter. On average, NOI has grown around 3.5% annually since 2010 for retail properties in the NPI, similar to the growth seen for offices and warehouse properties during the same time period.

This growth continues even as e-commerce claims an increasing share of retail sales. Yet the report notes that while “the convenience and ease of online shopping is undeniable,” it cannot replicate the experience of shopping in a physical store. “Ultimately, online will make retailers more efficient, but it will require substantial investment to create a seamless, interactive in-store experience that resonates with consumers,” the report states.

Increasingly, that in-store experience is, well, an experience rather than simply buying things. “Consumers of all ages, not just millennials, are spending more on experiences and less on material goods,” according to TH Real Estate. “Among all consumer spending categories, Mintel expects spending on experiences, such as dining out and vacations, to grow the fastest during the next five years.”

This change in consumer preferences is reflected in a changing mix of tenants and uses at the nation's top malls and shopping centers. TH Real Estate cites GGP data showing that entertainment and food accounted for 40% of the REIT's leasing activity in 2017, compared with 24% in 2013. The proportions were roughly reversed for apparel's share of this year's leasing compared to four years ago.