Why Shopping Center Performance Outpaces Retail REITs—and What Investors Should Do Now

The retail sector's post-pandemic recovery has been anything but uniform. While physical shopping centers, particularly top-tier assets in key regions, have stabilized and even thrived, their public REIT counterparts have lagged behind in stock performance. This divergence—strong operational metrics for malls versus underwhelming equity returns—poses a critical question for investors: Why the gap, and how can it be exploited?

The Operational Resilience of Top-Tier Shopping Centers

Physical shopping centers are experiencing a segmented recovery, driven by occupancy rates and strategic modernization. According to MSCI data, malls in the top quartile (with occupancy above 95%) have maintained rental growth momentum, while those in the bottom quartile saw stagnant rents and rising vacancies. This bifurcation reflects a winner-takes-all dynamic: prime locations with necessity-driven tenants (e.g., grocery-anchored centers) or vibrant experiential offerings are outperforming undermanaged, lower-traffic assets.

In Southern Europe and Central and Eastern Europe (CEE), for instance, malls are projected to deliver 10.7% annual total returns through 2025, fueled by narrowing yield spreads and stable income streams. Meanwhile, necessity-focused retail parks—where vacancy rates dipped to 1.2% in Q3 2024—have become investor darlings due to their tight supply and demand for essential goods.

The Valuation Gap: Why REITs Lag Despite Strong Fundamentals

Despite this operational resilience, retail REITs trade at discounts compared to other real estate sectors. As of June 2025, they commanded an average AFFO multiple of 16.1x, trailing multifamily (17.4x) and industrial (18.0x) REITs. Their NAV discount of 18.7% also lags behind manufactured housing (12.2%) and multifamily (19.2%), suggesting market skepticism about retail's long-term prospects.

Investors are pricing in risks like e-commerce competition, supply chain disruptions, and macroeconomic uncertainty. Yet, the data tells a different story:
- Same-store NOI growth for top shopping center REITs has averaged 3–6% annually for six straight quarters, outpacing inflation.
- Vacancy rates for necessity retail parks are near record lows, while malls in Southern Europe and CEE have vacancy rates below 6%—well below pre-pandemic levels.

The disconnect is exacerbated by sector-specific headwinds:
- Overhang of office bifurcation: Concerns about declining office demand have spilled into retail sentiment, despite malls' distinct drivers (e.g., consumer spending trends).
- Policy uncertainty: Fears of U.S. tariffs or energy price spikes—though more impactful to industrial and logistics assets—have kept retail REIT multiples suppressed.

Regional Opportunities: Where to Focus

The key to unlocking value lies in geographic and subsector specialization:
1. Southern Europe and CEE: These regions offer the highest yield opportunities, with stable demand for modern, mixed-use malls. Investors should prioritize REITs with exposure to Spain, Italy, or Poland.
2. Retail parks and necessity retail: These assets, with their low vacancy rates and steady income, are less vulnerable to e-commerce. U.S. REITs like Kite Realty Group (KRG) and Agree Realty (ADC) dominate this segment.
3. Modernized, experiential centers: Malls with dining, entertainment, or wellness amenities—think Europe's “lifestyle centers”—are attracting foot traffic even as traditional retailers shrink.

Risks to Monitor

While the long-term outlook is positive, near-term risks remain:
- Tariffs and energy costs: A U.S. trade war with China or a spike in European energy prices could dampen discretionary spending.
- Bifurcation risks: Underperforming malls (e.g., those with >10% vacancy) may see further declines, widening the gap with top assets.
- Interest rates: A prolonged period of high borrowing costs could delay cap rate compression, though REITs with strong balance sheets (e.g., KIM's 4.5x net debt/EBITDA) are better insulated.

Investment Strategy: Exploit the Discount, but Be Selective

For investors, the path forward is clear but nuanced:
1. Buy undervalued REITs with top-tier assets: Focus on REITs trading at NAV discounts but with >95% occupancy and exposure to high-growth regions. Kimco (KIM) and Whitestone (WSR) fit this profile.
2. Avoid traditional mall REITs: Legacy mall operators with high vacancy rates or overexposure to declining sectors (e.g., apparel) should be avoided.
3. Consider direct mall investments: For sophisticated investors, buying individual assets in Southern Europe or CEE could yield higher returns than REITs, though with greater complexity.

Conclusion

The gap between thriving shopping centers and lagging REIT stocks is a buying opportunity in disguise. Investors who prioritize geographic and operational quality—focusing on necessity retail, modernized assets, and high-growth regions—can capitalize on undervalued REITs and physical properties. However, success requires patience: the market's skepticism won't vanish overnight, but as occupancy rates hold and macro risks fade, the discount will narrow.

In the words of a retail analyst: “The best malls aren't just surviving—they're thriving. The question is, are you invested in the ones that matter?”

Data as of June 2025. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.