This episode argues that retail real estate is mispriced: it's not all retail dying, just apparel retail. Sorin Capital sees opportunity in community shopping centers (anchored by grocery stores) that have been sold off as much as malls but have better fundamentals. Key holdings: Simon Property Group (SPG, a mall operator used as context), GGP/Rouse (a distressed mall portfolio where Sorin bought bonds at 50 cents and got paid 109 within 9 months), and Macy's/Sears/JCPenney (struggling department stores that are the core problem for malls).
Sorin Capital is a $1 billion hedge fund focused on commercial real estate, REITs, and commercial mortgage-backed securities. In this podcast, team leaders Jim Higgins and Tom Digan discussed investment opportunities in the retail real estate sector. The core thesis is that despite apparent pressure
Jim Higgins (Founder of Sorin Capital) and Tom Digan (Portfolio Manager) manage a $1 billion hedge fund focused on commercial real estate REITs and CMBS. The core thesis of this episode is: Retail real estate appears under pressure on the surface, but structural mispricing exists in the market, with high-quality mall assets being excessively sold off, creating buying opportunities for active managers. The most impactful judgment in the entire episode comes from Rick (Head of Research): "This is not the death of retail, but the death of apparel retail" — over half of the square footage in U.S. retail real estate comes from malls, department stores, and other large anchor tenants, and the apparel category is being eroded by e-commerce, while other retail categories (such as groceries) remain largely unaffected.
Tom Digan argues that retail real estate experienced a systemic panic in 2017, but the market conflated "retail" with "retail real estate."
Rick (Head of Research) further breaks it down: Among 13 retail categories, only three are being significantly eroded by e-commerce—apparel, electronics, and books/music. E-commerce penetration in these categories has doubled from high single-digit/low double-digit levels five years ago to around 20%. However, for the remaining categories (groceries, autos, etc.), e-commerce penetration has barely moved and remains at very low single digits.
> Quote: Tom Digan said: "The retail industry, frankly, it's constantly evolving. Some tenants are failing, some are thriving, and new ones are coming on the scene."
Rick emphasizes that there are fundamental structural differences within retail real estate, yet the market has sold them off indiscriminately.
| Metric | Malls | Shopping Centers | Grocery-Anchored Shopping Centers |
|---|---|---|---|
| Q2 2017 YoY Foot Traffic Change | -5% | +2% | +3% |
| Peak-to-Trough Decline (approx. 9 months) | ~40% | ~40% | ~40% |
Rick's assessment: "The mall business is heavily concentrated in apparel (typically 50%-60% or more), plus department stores (also mostly apparel). This is a structural issue under siege from e-commerce. In contrast, the business model of grocery-anchored shopping centers is entirely different, and their fundamentals remain healthy."
> Quote: Rick said: "The mall business has very high concentrations of apparel exposure, typically 50%, 60% or more... That's problematic, we think."
Jim Higgins and Rick describe how Sorin builds positions during market panics: going long high-quality shopping center REITs that were unfairly sold off, while hedging out macro risks.
> Quote: Rick said: "The disconnect here is so extreme that we would be not surprised to see either public-to-private M&A or public-to-public M&A."
Jim Higgins argues that the rise of passive ETFs has indeed extended the duration of mispricing, but has also created more extreme pricing opportunities.
> Quote: Jim said: "Those flows can be powerful... we've got a couple of examples of things, REITs that we think are very overvalued, but when there's big flows coming into a sector... you can see some things that we think are very overpriced become ridiculously overpriced."
| Position | Analyst Stance | Key Data |
|---|---|---|
| Simon Property Group (SPG) | Neutral (as a background case) | Since its IPO in 1993, the list of top 10 tenants has been replaced more than three times |
| GGP / Rouse | Not explicitly stated (as a CMBS investment case) | A low-quality mall portfolio spun off by GGP; Sorin conducted on-site research and discovered management had improvement plans, ultimately buying CMBS bonds at 50 cents and receiving payment at 109 dollars within 9 months |
| Macy's / Sears / JCPenney | Risk warning | These department stores are the core problem of the mall model—declining foot traffic, store closures, and extremely low rents (approximately $3 per square foot) |
| Warby Parker / Apple / Bonobos / Athleta / Anthropologie | Bullish (as growth cases) | These retailers perform well in physical stores and represent the "winners" |
| Whole Foods | Neutral (as a trend validation) | Amazon's acquisition of Whole Foods validated that the grocery category is difficult to be largely replaced by e-commerce |
1. "This is not the death of retail, but the death of apparel retail" (Rick) — Among 13 retail categories, only three (apparel, electronics, books/music) have been heavily eroded by e-commerce, while e-commerce penetration in the remaining categories has barely moved. The core problem with U.S. retail real estate is "excessive mallification and excessive apparel reliance."
2. Malls and shopping centers are two entirely different businesses (Rick) — Malls rely on a department store subsidy model (department stores pay $3/sq ft, while small shops pay $35–50/sq ft), whereas shopping centers (especially grocery-anchored ones) provide daily essential services and still see foot traffic growth (+2% to +3%). Yet both have experienced the same decline (roughly 40%), creating a mispricing.
3. Passive ETFs prolong the duration of mispricing but also create extreme opportunities (Jim) — Passive capital inflows force index funds to buy all constituent stocks, undervaluing quality assets while potentially overvaluing inferior ones (with premiums near 100%), offering active managers two-sided opportunities.
4. The "first 7 years, last 3 years" rule of CMBS (Tom) — For 10-year CMBS loans, the first 7 years are primarily driven by macro factors (S&P 500, credit spreads), while the last 3 years are when credit risk is traded and active management advantages come into play. The market is currently at this inflection point.
5. Do not take liquidity risk on the hedging side (Jim) — During the 2008 crisis, Sorin took liquidity risk on the long side and was compensated, but also took liquidity risk on the short hedging side, preventing timely adjustments and eroding profits. "You can take liquidity risk on the alpha side, but never on the hedging side."
6. Sorin's "client customization" model (Jim) — Shifting from "here is my product, you buy it" to "here are my capabilities, what do you need?" One large pension client required 10%–12% returns, could tolerate a 15% drawdown, and had a 2–3 year time horizon; an Asian bank client required 6%–8% returns, low volatility, low leverage, and low duration. The fee structures for the two were entirely different.
7. Regulatory changes create new opportunities (Jim) — As banks and broker-dealers exit the CMBS secondary market market-making role due to higher capital requirements, Sorin has launched an active trading strategy to fill this gap, providing liquidity to the market and being compensated for it. This is currently one of the highest-conviction themes.
8. "Retail is not retail real estate" (Jim) — Retail is the business activity of retailers, while retail real estate is hard assets. The two are related but distinct. The market equates "retail's struggles" with "retail real estate's struggles," ignoring the underlying property value and location advantages. "Real estate in good locations will always have demand."