In commercial real estate in 2002, retail was the real deal. In fact, for real estate investors, it was the only deal.

While vacancies ballooned and rents languished in the office and apartment sectors, the resilient consumer kept retail landlords flush with profits. In turn, investors in retail REITs were well rewarded. Mall REITs posted nearly 25 percent returns while community center returns averaged better than 12 percent on the year.

Against a backdrop of the broader markets racking up double-digit losses and a break-even performance from REITs overall, mall and community center investors are ecstatic. If they expect a repeat performance, however, 2003 may be a disappointment. Although retail REITs may again outperform other sectors, this is likely to be a challenging year for many shopping center landlords.

Here's a look at three trends that will impact retail REIT investors in 2003.

Don't count on the consumer

2002 was the year of the consumer, with many economic soothsayers suggesting that robust consumer spending was the only phenomenon keeping the economy from a double-dip recession. Yet, the holiday shopping season brought signs of a tired consumer, and consumer confidence data suggest strength is unraveling. With the Fed — and retailers — running out of tricks to excite a Pavlovian reaction from consumers, expect weakness in retail sales. The weakness should start — some say has already started — with department stores, which should put downward pressure on mall traffic. Because a portion of mall rents are driven by sales at these anchors, the travails of department stores are of significant concern. Lofty expectations of favorable comps from the malls may prove disappointing.

Supply becomes an issue

Retail REITs have benefited from a lack of new competition coming to market. Although cheap capital may tempt developers, the time and cost involved with new builds make the risk in the current economic environment untenable for all but the largest retail developers. So, there has been very little new mall development — a factor that has helped the business. However, troubles at retailers, ranging from the Gap to Kmart, mean less demand for new space just as old space is regurgitated. From malls to community centers, that could mean pressure on rents and lease concessions, including tenant improvements. One REIT fund manager, who has been negative on retail REITs since summer, tells me that more than 52 million square feet of retail space was scheduled to be vacated in 2002.

Consolidation continues

Recent courtships — successful or not — are a sign of the times in retail real estate. Simon wants to buy Taubman so it can squeeze synergies from the high-profile malls to meet growth targets. Pan Pacific bought Center Trust to become the preeminent community center player on the West Coast. Developers Diversified bought JDN because JDN was motivated to sell, almost at any price. General Growth keeps buying assets simply because it can. While prudent acquisitions — like the Pan Pacific or DDR deals — can be good for shareholders, the concurrent decline in cap rates and fundamentals increases the risk acquirers will overpay. The potential for overpaying grows as retail REITs target rivals or assets just to meet short-term growth targets. It pays for investors to recognize the difference.

Other trends will emerge. Niche property owners — such as Acadia Realty in the Northeast — should shine in a more difficult market; the impact of Wal-Mart on the grocery business and, as a result, community centers, will continue to unfold; and retail REITs, especially regional mall operators, will be asked by investors to be more forthcoming with financial data.

With challenges, however, come opportunities. And, retail real estate will have plenty of opportunity to maintain its shine in 2003. It will be just a bit more challenging than the year just passed.

Happy New Year.

Christopher S. Edmonds is the director of research at Pritchard Capital Partners, a New Orleans investment firm and a contributing editor writing about REITs for TheStreet.com.