Performance Effects of Corporate Real Estate Ownership for the Retail Industry

This paper is an exploratory study into the performance effects of corporate real estate (CRE) ownership for retail companies in the US. In the recent years, many brick-and-mortar retail stores have announced massive closings (as announced in 2018, 142 Sears locations will be closed, while Toys “R” Us filed for bankruptcy and announced shutting down all 800 locations). These struggles, along with the rise of e-commerce, signal significant changes in the CRE strategies for retail firms going forward. According to Gibson and Barkham (2001), CRE is closely linked to the business strategy of companies in the retail sector. As retail companies seek to assemble valuable CRE portfolios that can generate sustainable competitive advantages, inferior or inefficient locations can significantly undermine their long-term financial performance. On one hand, portfolio theory suggests that if real estate assets have a different risk profile than that of the operating business, then CRE ownership has the potential to provide diversification benefit to firms with high levels of property holdings. On the other hand, Tuzel (2010) has asserted that real estate risk is systematic, and CRE investment is riskier than investment in other types of capital for the firm due to slow depreciation of real estate. Therefore, firms with high real estate holdings are hurt more during recessions (Tuzel, 2010). For these reasons, CRE ownership has the potential to significantly impact the performance of retail companies.