Real estate funds, market stars since the financial crisis ended in 2009, have faltered, dragged down by the closing of big stores at malls across the United States.
The unanswered question now is whether investors in malls can successfully adjust to a threatening environment.
Real estate mutual funds and exchange-traded funds hold real estate investment trusts (REITs) that must deliver at least 90 percent of after-tax earnings to investors. REITs own all sorts of income-producing property: shopping malls, apartment complexes, industrial warehouses and medical buildings, for example.
Coveted for their yield (2.18 percent over the past year) in a low-rate environment, REIT-owning mutual funds have returned 8.5 percent annually over the past half-decade. But in the 12 months through June, they actually produced a negative return of 0.61 percent, hamstrung by a 17 percent average negative return among retail REITs, according to David Kathman, an analyst at Morningstar.
Leading real estate ETFs like Vanguard REIT and iShares Cohen & Steers REIT have also produced diminished returns over the past year.
Some real estate sectors continue to thrive. But mall REITs like Simon Property Group, GGP (formerly General Growth Properties) and CBL & Associates have suffered as numerous retail outlets have folded. Simon, for example, closed June just under $162 a share. A year earlier, shares fetched about $217.
Recent closures and fears of wider surrender to online rivals like Amazon weigh heavily on REITs. Kingpin retailers like Macy’s, J.C. Penney and Sears have been shuttering stores, as have Foot Locker, Office Depot and Abercrombie & Fitch. Once-omnipresent chains like Payless ShoeSource and RadioShack have filed for bankruptcy.
The malls and shopping centers that host fading retailers are scurrying to find replacements, and there are some signs of success. The Natick Mall, west of Boston, lost one of its anchor tenants in J.C. Penney but has found a replacement for most of that space in Wegmans, the upscale supermarket. Wegmans could eventually produce 10 times the revenue of the departed J.C. Penney, estimates Russ Devlin, a research director with AEW Capital Management.
Still, problems for brick-and-mortar stores could worsen in the near future. Garrick Brown, director of retail research for the Americas at Cushman & Wakefield,…