All week, I’ve been sharing my insights from REITweek, the largest real estate investment trust event of the year. And as I shared yesterday, there are reasons to be optimistic.
But I also mentioned that there are stressors out there. One of them is the trend of bankruptcies and downsizing for several retail chains.
Last year, 27 retail companies declared bankruptcy. And halfway through 2024, another 14 have followed suit. That’s the fastest pace of bankruptcies since the pandemic began. The list includes Rite Aid, JOANN, Express, and Red Lobster.
And several others, including Family Dollar, CVS, and Macy’s are downsizing and closing stores.
As a landlord, one of the last things you want to hear is that one of your tenants is declaring bankruptcy. It usually leads to a vacant property that’s draining your money and not bringing in any rent.
But right now, something very strange is happening. Many landlords I’ve spoken to aren’t worried. In fact, they’re happy to see these tenants leave.
That deserves some explanation. So, let’s dive in…
Overbuilt
In my former career as a real estate developer, I made millions building stores and shopping centers for retail companies.
My very first deal was for Advance Auto Parts in Laurens, South Carolina. Over the years, I’ve built for Walmart, BI-LO, PetSmart, Barnes & Noble, Blockbuster, Payless, Walgreens, and many others.
Back then, real estate was booming, and we were building as fast as we could. Other developers were doing the same. As a result, many in this space found themselves over their proverbial skis.
Then came the Great Financial Crisis hit. I’m sure you remember that. Ask any real estate developer around back then and they definitely remember it.
Like many other real estate developers, I lost nearly everything: my properties, my franchises, my millions, and my career.
As I’ve shared on numerous occasions, I’ve built back my own wealth using the very same investment strategies I share with readers. The period was an eye-opener for me. And it was a serious wake-up call for other developers.
Over the past 15 years, construction of retail real estate has been very low. Developers have been signing up tenants before they break ground to build something new. Concern that online shopping would create a “retail apocalypse” has prevented wild speculation.
After much trial and error, retail companies have finally started to figure out e-commerce. People still want to see things in person before they buy. And even if they do decide to purchase online, the local store is still an important place for making deliveries and returning unwanted items.
In short, commercial real estate became smarter… and more efficient.
Still in Demand
As a result, retail vacancies today are at a historic low of 4.1%. The demand for space to open new stores is outpacing the available supply of retail real estate. And developers are still wary of building too much too fast.
According to real estate broker Jones Lang LaSalle, over 35% of the available retail space has been leased in the past 12 months. That’s the highest pace seen since the Financial Crisis.
And as the supply of retail real estate runs low, rents are going up.
That’s why retail landlords are secretly happy to see some of their tenants declare bankruptcy and move out.
The CEO of Kimco Realty – a real estate investment trust that owns shopping centers – recently commented that “it’s a nice time to be getting spaces back because you have the ability to pick a best-in-class retailer.”
Put very simply, the string of bankruptcies is not the death sentence for commercial real estate that many believe. Were this still the environment of the early 2000s when developers were building like crazy, I might be worried. But this is a very different world.
Supply is still limited. Demand remains intact. I have no doubt that these bankruptcies will have some impact on commercial real estate. But for the most part, landlords have the chance to replace struggling tenants with higher-quality tenants.
As I’ve said on numerous occasions, this market is simply adjusting to the new environment. That’s what markets do.
So, I’ll repeat what I told you yesterday. Commercial real estate has had a difficult few years. But everything I’ve seen – and everything I heard at REITweek – tells me there are plenty of reasons to be optimistic.
That’s good news for many of the REITs we hold in our model portfolios. And for any paid subscribers to our Intelligent Income Investor service, this could be an opportunity to get reacquainted with many of the names we hold there.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily