Is Blackstone Finalizing A Deal To Acquire One Of America's Largest Retail REITs?

The quality and size of a real estate investment trust's (REIT) portfolio are key components of its success. Blackstone has mastered this formula on its way to becoming the world's largest REIT and Reuters is reporting that Blackstone may be about to get even bigger. Speculation is rife that Blackstone is close to buying Retail Opportunity Income Corp (ROIC) for $3.4 billion.

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San Diego-based ROIC is one of the largest retail REITs in the Western United States and its portfolio includes 93 shopping centers that account for over 10 million square feet of retail space. According to ROIC's most recent earnings report, the REIT generated $32.1 million for Q3 2024, a significant improvement over the $8.1 million income ROIC reported in Q3 2023.

The strong performance may be related to the allocation of assets in the ROIC portfolio, which consists heavily of pharmacies and supermarkets. Unlike shopping malls, which largely offer retail products that people don't necessarily have to buy, ROIC's grocery store and pharmacy outlets are essential aspects of community life. 

ROIC's assets are also primarily strip malls and mini centers, whose tenants have been able to pass additional rent and product expenses on to consumers. Tenants of larger shopping malls and more expensive retail outlets have not been as successful. That is likely because, unlike strip centers that house grocery stores and pharmacies, shopping malls don't sell products (e.g., food, medicine) that people must buy.

This combination of a strong customer base and the ability to pass on expenses to consumers has kept ROIC investors somewhat insulated from the vacancy troubles that have plagued the retail real estate market since COVID-19. It has also helped power ROIC shares to an 11% increase this year. Despite that rise in share price, many analysts believe ROIC may be undervalued.

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That's because several key metrics indicate that things may be looking up for the retail real estate sector. First, inflation numbers returned to the 2% range targeted by the Federal Reserve as the threshold that must be crossed before it lowers interest rates. Second, ROIC reported that it increased rents on same-space leases by almost 14% in Q3 2024. More importantly, vacancy rates are going down.

Cushman and Wakefield reported that U.S. shopping centers had a vacancy rate of only 5.4% in Q3 2024. That's the lowest vacancy rate since Cushman and Wakefield began keeping stats on retail vacancy rates in 2007. Cushman and Wakefield also report that 6.4 million square feet of vacant retail space exists nationwide, a more than 30% decline from the 10 million square feet of vacant retail space Cushman reported in Q3 2023. 

Those numbers indicate that retail real estate is primed to make a comeback. With that in mind, it's logical that Blackstone would try to make a big deal while ROIC is still undervalued. However, any potential deal is far from done. News of the potential deal first appeared in Reuters and neither Blackstone nor ROIC has publicly commented on it.

That means another player could still jump into the mix and make an offer. In the meantime, the rumors of this acquisition could signal that positive developments may be returning to the retail REIT sector. The Federal Reserve is cutting rates and consumers are beginning to spend again. Investors may want to keep an eye out for growth opportunities here. 

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