Brick-and-mortar retailers have been under significant pressure in recent years as more consumers do their shopping online. Unfortunately, the retail apocalypse has gone from bad to worse this year because the COVID-19 outbreak forced many nonessential retailers to close their physical stores. That's putting further stress on their already troubled finances, which could cause more to close up shop permanently. Those closures would put more pressure on the occupancy levels of retail centers, further impacting their income streams.
However, while many see challenges in the retail landscape, others see an opportunity, including leading retail property owners Brookfield Asset Management (NYSE: BAM) and Kimco Realty (NYSE: KIM). Both are launching separate investment vehicles to capture opportunities in the space, suggesting they see some light amid all the darkness.
A $5 billion bet on retail revitalization
Brookfield Asset Management is one of the largest commercial property investors in the world. One of its biggest investments is in retail real estate. Through its affiliates Brookfield Property Partners (NASDAQ: BPY) and Brookfield Property REIT (NASDAQ: BPYU), Brookfield took control of leading mall owner General Growth Properties, which owns 122 high-quality malls and urban retail properties. Brookfield also owns 42 retail properties via its various private equity funds.
Because of that, it has a lot riding on the line if retailers continue closing locations. That's why the company recently launched the Retail Revitalization Program. Brookfield and its partners are putting up $5 billion of capital to help recapitalize retail businesses in its major markets. Through the program, the Brookfield-led group will make non-control investments in retailers, giving them funding to reduce debt and ease some of their financial constraints. Brookfield aims to provide financial assistance to retailers so that they don't need to reorganize through bankruptcy.
Brookfield has had lots of success in restructuring and rejuvenating several industries over the years. However, it has recently started investing directly into turning around struggling retailers. For example, the company partnered with fellow mall owner Simon Property (NYSE: SPG) to revitalize retailer Aeropostale and recently completed a similar deal with Simon to try to replicate their success with Forever 21.
By improving the financial health and operations of retailers, these companies will be able to continue paying rent in properties owned by Brookfield. The company also stands to benefit from its direct investment in these retailers. If they're successful, Brookfield's investment will increase in value.
Starting a new investment vehicle
Kimco Realty is one of North America's largest owners of open-air shopping centers. The retail REIT currently has an interest in more than 400 properties, most of which have grocery stores as their anchor tenants.
While Kimco is already a major investor in retail real estate, it believes that the COVID-19 outbreak could provide a unique investment opportunity. Because of that, it's exploring the potential to sponsor a separate investment vehicle. It could invest between $50 million and $100 million into this vehicle, which would raise additional capital from other investors.
Potential investment opportunities could include acquiring retail properties that the current owners need to sell because of financial stress or forming joint ventures with owners that need to raise cash to pay down debt or complete development projects. Kimco would receive income from managing this vehicle. It also stands to potentially earn a positive return on its investment via dividends paid by the investment vehicle as well as capital gains as property values improve.
Retail isn't dying; it's evolving
The retail sector is undergoing a major shift as more consumers do their shopping online. However, that doesn't mean physical retail will die out. That's clearly the view taken by major retail property owners Brookfield and Kimco as they're increasing their investment in the sector this year even though conditions have grown much worse. These bets demonstrate their firm belief that physical retail still has a bright future, which should enable them to earn an attractive return on these opportunistic investments.