Tenant stock market performance and retail Real Estate prices

ABSTRACT

We investigate the predictive value of tenant stock market performance for retail real estate transaction prices. In our empirical investigation, we focus on discount and non-discount (i.e. premium and mid-tier) department stores, which represent important anchor tenant groups in general-purpose shopping centres. We first show that the industry-level stock market performance of non-discount department stores, but not discount department stores, predicts retail real estate investor sentiment and total returns in the next quarter. Explanations for our findings include the struggles of non-discount department stores with changing consumer preferences, e-commerce, and discount competition, which affect their credit, bankruptcy, and store closure risk. Using a sample of 5,507 general-purpose shopping centre transactions, we then provide evidence that the stock market performance of non-discount department stores in the previous quarter has a positive relationship with transaction prices for shopping centres in lower quality locations (suburban) and of lower property quality. The stock market performance of discount department stores only has predictive value for transaction prices of malls with the highest risk to investors.

KEYWORDS:

• Commercial Real Estate
• tenant quality
• transaction prices
• stock market
• mixed effects regression

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Our investigation focuses on stock market performance as a forward-looking measure of tenant quality. We acknowledge that an investigation into a variety of tenant quality measures is relevant and suggest future research ideas in the conclusion.

2. https://www.icsc.com/uploads/t07-subpage/US-Shopping-Center-Definition-Standard.pdf

3. https://www.vox.com/recode/21717536/department-store-middle-class-amazon-online-shopping-covid-19; https://www.washingtonpost.com/business/2021/04/16/half-countrys-remaining-mall-based-department-stores-are-expected-shutter-by-2025/

4. To our knowledge, no previous empirical study investigates the information content of industry-specific research reports from consulting firms, industry analyses from stock market analysts, or articles in the financial press for asset pricing decisions of real estate investors and/or to create a tenant quality measure. Future studies may fill this gap in the literature.

5. https://www.vox.com/recode/21717536/department-store-middle-class-amazon-online-shopping-covid-19

6. The firms are Saks Inc, May Department Stores Co, Dillards Co, Macys Co, Neiman Marcus Group Inc, Penney J C Co Inc, Gottschalks Inc, Stein Mart Inc, Kohls Inc, Burlington Stores Inc, Value City Department Stores Inc, Retail Ventures Inc, Federated Department Stores Inc, Sears Roebuck & Co, Nordstrom Inc.

7. https://www.vox.com/recode/21717536/department-store-middle-class-amazon-online-shopping-covid-19; https://www.washingtonpost.com/business/2021/04/16/half-countrys-remaining-mall-based-department-stores-are-expected-shutter-by-2025/

8. We acknowledge that the appraisal based NPI suffers from issues such as appraisal smoothing. However, considering that NCREIF discontinued its transaction based index (https://user.ncreif.org/data-products/tbi/), no alternative source for commercial real estate returns exists.

9. We acknowledge that shopping centres included in the NPI can differ from some of the shopping centres in which retailers in our sample have their department stores.

10. While the acquisition process for retail properties can take a couple of months to cover due diligence and securing financing, most negotiations relevant to the transaction price determination occur within the 30 to 60 days before closing. The lag chosen in our investigation reflects this period.

11. We acknowledge that appraisals and transaction prices differ. Future studies may complement our study by investigating, using experimental designs or surveys, how tenant quality measures influence appraisers.

12. https://www.costar.com/docs/default-source/brs-lib/costar_buildingratingsystem-definition.pdf?sfvrsn=12a507a4_2

13. Following the suggestion by a reviewer, we assessed whether the Costar rating has a non-linear relationship with asset prices. We do not find evidence for non-linearity.

Additional information

Notes on contributors

Carina Kaiser

Carina Kaiser is a PhD Student at IRE|BS International Real Estate Business School at the University of Regensburg in Regensburg, Bavaria (Germany). Her PhD research focuses on determinants of asset pricing in retail real estate and previous work has been published in the Journal of Property Research.

Julia Freybote

Dr. Julia Freybote is an Associate Professor of Finance and Real Estate in The School of Business at Portland State University in Portland, Oregon (USA). She holds a PhD in real estate from Georgia State University and her work has been published in journals such as Real Estate Economics, the Journal of Real Estate Research, Journal of Property Research and Journal of Real Estate Finance and Economics. Her research predominantly focuses on investor behaviour, information environment and asset pricing in the REIT and commercial real estate market.