At the end of April it appeared that retail REITs were well on the way to another boffo year. Total returns for all retail REITs at that point stood at just a hair below 11 percent and led all other sectors.

And then April's sales numbers were announced.

Same-store sales posted the largest loss in the 30 years that the statistic has been tracked. The Commerce Department's retail sales figures weren't much better. Industry observers blamed the lackluster results on the colder-than-normal weather and the so-called Easter shift, which pushed most Easter-related sales into March. (The shift did buoy that month's sales figures.)

As a result, retail REITs dropped in May. At the end of the month, retail REITs were still up 6.35 percent for the year in total returns. That's still better than most other property sectors. And regional mall REITs had total returns of 9.33 percent, bettering all other sectors. Better yet, May retail figures showed a healthy rebound. Same-store sales rose 2.5 percent in May, according to ICSC. According to the Commerce Department, sales were up 1.4 percent in May, the largest one-month gain in 16 months.

Despite the positive news, the bleeding hasn't stopped for retail REITs. There was still about a week to go in June at press time, so NAREIT's month-end numbers weren't available. But it's clear that investors have continued their sell-off. As of June 22, most retail REITs are down for the year (see chart on page 6). The only four companies with stock prices above where they started the year were Acadia Realty Trust (up 11.66 percent), Kite Realty Group (up 6.67 percent), General Growth Properties (up 2.58 percent) and Equity One Inc. (up 1.00 percent). Every other retail REIT is down for the year.

But why? Analysts primarily point to tremors in the debt market as one of the main culprits. A high number of debt issuances in the first six months of the year has investors a bit leery.

“There's a wide range of leverage in the retail industry,” says John Kriz, managing director at Moody's Investors Service. “Some property owners are highly leveraged with lots of secured debt. Some have no secured debt with moderate leverage…. If you are highly levered with secured debt, that decreases your strategic and financial stability.”

There are other causes for concern.

The number of store closings started out slow. For a while, it appeared that the first quarter of 2007 would see the fewest store closings in the six years that ICSC has tracked that statistic. But that's not the case. In fact, there were 1,916 closings during the quarter, just 201 less than 2006 and almost double the 999 in the first quarter in 2005. And for the second quarter another 617 closings occurred, putting the total at 2,533 — more than in 2005 and virtually the same as last year.

Moreover, concerns remain about retail sales. Spending at the higher end has been the most robust so far.

So Merrill Lynch REIT analysts, for example, are more bullish about regional mall REITs like Simon Property Group, Taubman Centers and General Growth Properties that serve that market. Among the retail REITs in Merrill Lynch's coverage universe (which is smaller than NAREIT's pool), regional mall REITs have posted total returns of 3.0 percent for the year while community center REITs have posted total returns down 3.8 percent for the year.

In the end, the recent decline means that most retail REITs are now trading in-line or at small premiums to analysts' estimated net asset values (after trading at big premiums earlier in the year).

So it is not clear whether retail REITs will return to 52-week highs anytime soon, even though fundamentals remain stable.

“The equity market makes its own determination of value,” Kriz says. “From Moody's perspective, retail is one of the most stable and one of the best franchise businesses of all property types. And I don't see anything that has occurred that would change that view.”