Those in the retail real estate industry who hoped the second half of 2009 would bring the long-awaited rush of investment sales transactions are likely to be disappointed. As the end of third quarter approaches, deals involving smaller, single-tenant properties continue to take place, but the market for transactions larger than $10 million remains dormant. Brokers say that though the bid/ask gap—one of the key obstacles in the transaction freeze— between sellers and buyers appears to have narrowed. Many owners are opting not to sell unless they are forced to. Add to this the fact that banks still seem to favor the pretend and extend approach rather than foreclosing on properties and a true shift in market dynamics isn’t likely to occur for some time.

In July, the most recent month for which data is available, retail investment sales totaled $413 million, according to Real Capital Analytics, a New York City-based real estate research firm. The figure represents a 6 percent increase over June, but even with the slight uptick, the investment sales market is still nowhere near a healthy level of activity, says Bernard J. Haddigan, senior vice president and managing director of the national retail group with Marcus & Millichap Real Estate Investment Services, an Encino, Calif.-based brokerage firm.

“I still believe that we have not hit the bottom, in retail in particular,” he notes. “I don’t see any quick recovery. I think [going forward] it’s going to be a lot of note sales, net lease deals, we can still trade food-anchored centers, but the question is, ‘Do the owners have to sell?’ I don’t see any significant pick-up in velocity at this point.”

Part of the problem, according to Real Capital Analytics, is that retail properties experiencing distress on the financing level are being kept off the market by their lenders. The firm estimates that so far, retail assets worth $33.6 billion have entered into default, foreclosure or bankruptcy. Yet only $1.1 billion of assets had been foreclosed on and just $573 million, or less than 0.2 percent of all distressed situations, have been resolved. Aware they will likely lose money if they attempt to sell today, banks are extending the mortgages or reworking them instead.

At the same time, potential buyers worry about rising vacancy levels and falling rents and are severely constrained by lack of available credit, adds Haddigan. Without a significant improvement in the outlook for the retail sector, investors can’t predict what a given center’s NOI might look like 12 months down the road, and that leads them to take the attitude of “unless I am stealing it, I am going to wait a while,” Haddigan says.

There are some deals larger than $10 million happening here and there, but they tend to involve high quality assets with assumable, non-recourse financing in place, says Jeff Hughes, senior director with Stan Johnson Co., a Tulsa, Okla.-based commercial real estate firm. And not many owners are in sufficient need of new liquidity to put those on the market. The bulk of retail investment sales is still made up of single-tenant properties priced under $10 million and 1031 exchanges.

The good news is that the ongoing activity freeze has made sellers more aware of the need to adjust their pricing expectations. Properties that used to sell in the 6 percent to 7 percent range two years ago are now trading at cap rates between 7.75 percent and 8.25 percent, according to Rich Walter, president of Faris Lee Investments, an Irvine, Calif.-based retail real estate brokerage firm. Still, until some sort of resolution begins to take place in the lending sector, he doesn’t expect a significant uptick in sales.

“I would say it’s pretty flat and it’s going to be this way for a while, until we figure out financing,” he notes.