Open-air shopping centers are an ideal opportunity for private real estate investors and one area many are not paying attention to, according to a recent report published by real estate investment firm Cohen & Steers. 

The New York firm believes a retail renaissance has arrived, and open-air shopping centers are the only aspect of the retail space doing well.

Several unsettling trends have affected retail real estate in the last few years. During the global financial crisis, construction financing dried up. At the same time, e-commerce gave people the option to do all their buying online. Warehouses were taking market share away from traditional retail spaces. By 2017, it looked as if the traditional retail space was dead. 

“Amazon stock was climbing as it disintermediated one retail product category after another, and it seemed as if the physical store had become an obsolete construct,” the Cohen & Steers report said. “The smartphone, warehouse and delivery truck were to be the new logistical system through which consumers received their goods.” 

But that’s turned out not to be the case, the report goes on: Retail stores such as Target and Walmart have incorporated e-commerce into their retail model and begun to thrive, according to James Corl, head of the private real estate group at Cohen & Steers and the report’s author. 

“The warehouse is no longer taking share from the stores [and] instead of e-commerce being a negative for store-based retail, it’s now a positive,” he writes.

Consumers can shop online, but they still use the retail space as a location to look at a product and return it as well, he said. As more attention is paid to the retail space in general, the interest in warehouses is on the decline. There’s been a turn to more open-air retail spaces. 

“As a result of many years of very low levels of retail property development, and the renewed demand for stores from reinvigorated retailers, shopping centers are now the most highly occupied of any major commercial property type in the U.S.,” the report said. 

It is a space that few firms are looking at or investing in, according to Corl. Many investors are still putting their money in apartments and warehouses, which were more in demand in the previous cycle. 

“That’s why a lot of those vehicles are struggling, because they basically have last cycle’s winners in their portfolio,” he said. “Both core funds and non-traded REITs are experiencing withdrawals right now and redemptions, and they’re not actually able to sell properties quickly enough to meet the redemptions.” 

They are also unable to sell down last cycle’s winners and reposition themselves in investments such as open-air shopping centers, Corl said.

He cautioned advisors looking to make investments in private real estate from making the same mistakes others have and said they should avoid those underperforming areas. 

“Advisors need to make sure that they’re not overweighted in the underperforming property types and they need to find a vehicle that has exposure to this retail trend,” he said.

The firm believes that a combination of durable acceleration in earnings growth, coupled with relatively high current yields, will propel shopping performance for some time.

“This is a reality that the market has yet to fully recognize,” the report said. “While this circumstance remains, we will be deploying capital to aggressively take advantage of the arrival of the Retail Renaissance.”