One of the big challenges facing the retail real estate sector is that with so few investment sales getting done there is little confidence that the prices paid reflect true property values or cap rates.

In testimony before Congress' Joint Economic Committee on July 9, Jeffrey Deboer, president and CEO of the Real Estate Roundtable, said, "With a scarcity of property transactions, there is no effective price discovery, and this further exacerbates the real estate market crash."

According to the most recent data from Real Capital Analytics (RCA), a New York City-based research firm, cap rates on closed sales of retail properties averaged approximately 7.75 percent in May, a comparatively slight increase from the 7.5 percent reported in January. (At the peak of the market, in 2007, cap rates were in the 6 percent range). But RCA researchers note that the limited market data in the absence of new transactions make it hard to come up with a true benchmark for retail caps. The average cap rate for May is based on total retail sales volume of just $418 million, down 89 percent from May 2007, according to RCA. Further, most of the sales getting done are on stabilized properties—the only kinds of deals that can get financed in the current environment. If more distressed sales were occurring, market participants think average cap rates would be quite a bit higher.

This month, Moody's/Real Commercial Property Price Indices reported a drop of 19.4 percent for retail assets compared to the same period in 2007, to 150.09. The retail index was also off 12.9 percent compared to one quarter ago. Moody's estimates that for all commercial property types, the Aggregate Price Index has declined 34.8 percent compared to its peak in October 2007.

Investment sales brokers say that in reality, cap rates on class-A multi-tenant assets have now passed the 9 percent mark, while class-B assets are trading above 10 percent. Meanwhile, because of the uncertainty in the market, no one is confident enough to project future cash flows on class-C assets, making cap rates impossible to pin down. Instead, buyers are focusing on price per square foot and whether the property has any potential upside, says George B. Good, executive vice president in the Chicago office with the capital markets group of CB Richard Ellis, a global real estate services provider.

And though some industry insiders hope we are beginning to see signs of the bottom in the retail real estate market, others say cap rates might continue to rise further.

"The market is still very challenged," says Kris Cooper, managing director with the retail investment sales team at Jones Lang LaSalle (JLL), a Chicago-based real estate services firm. "Tenants who were doing well a couple of years ago, are maybe not doing so well. So as an owner, you have pressure not only on your cash stream, but on your NOI stream."

As a result of financing difficulties and the perception that retail assets will continue to lose value for the foreseeable future, buyers of retail centers remain few and far between. Most REITs and insurance companies have stopped acquisition activity altogether, says Bernard Haddigan, managing director of the national retail group with Marcus & Millichap Real Estate Services, an Encino, Calif.-based brokerage firm. The ratio of malls put on offer to malls in closing in May was 4 to 1, and the ratio of strip centers on offer to strip centers in closing was 2.5 to 1, according to RCA data. By contrast, the ratio of assets on offer to assets in closing for all commercial property types was 1.8 to 1.

The number of bids coming in for retail centers has receded to a trickle compared to what was taking place in 2007, according to Good. Good's team is in various stages of marketing and disposition with 35 properties and each property has received two or three bids. But a year and a half ago, there typically would be more than a dozen potential buyers for each center, Good says.

In the absence of competition and with awareness that many sellers in today's market remain under pressure to raise cash, some buyers have been putting in bids with artificially high cap rates just to see what they could get away with, notes Cooper. His team is currently representing a number of special servicers with distressed assets and though the firm has received substantial interest in the properties, some bids came in above 15 percent. "Generally, they are not from what we consider serious buyers and where deals are going to get done [cap rates are] going to be lower than that," Cooper says. But even when buyers put in legitimate bids, the cap rates "are still not great," he adds.

Even higher quality assets are losing their cachet. In addition to distressed properties, Cooper's team is working with a number of REITs that are looking to dispose of non-strategic centers to raise cash to pay down debt maturities. According to JLL, most of the centers are decent properties and all are anchored. But Cooper expects that none will secure a cap rate above 9 percent. One property JLL is working on is a brand new, Best Buy-anchored center in Virginia that Cooper describes as a great asset, but it has remained on the market for a year and a half, largely because potential buyers kept backing out of negotiations for reasons unrelated to the quality of the center. In the mean time, the investment sales market continued to deteriorate, so the center's owner had to agree to several "cap rate adjustments." The property will soon be under letter of intent.

All of this begs the question of whether we are getting near the bottom of the market. Some of the brokers feel there is reason to think we are, but the real answer won't come until banks start actively selling assets belonging to distressed owners, notes Rich Walter, president of Faris Lee Investments, an Irvine, Calif.-based brokerage firm. In addition, bottom might come at different times for different parts of the country and for different asset types. Recovery for power centers, for example, which have already experienced a number of high profile tenant bankruptcies and liquidations and which are disproportionately impacted by co-tenancy provision, can suffer a significant setback should another bankruptcy come to pass, Walter says.

Meanwhile, even when the bottom for commercial real estate properties is established, the market might remain at a standstill far longer than people realize, Cooper adds. "It could be six months, 12 months, 18 months," he says.