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 property sectors.

And then April's retail sales figures were announced.

Same-store sales posted the largest loss in the 30 years that they have been tracked. The Commerce Department's retail sales figures backed it up. Industry observers blamed the lackluster results on the colder-than-normal weather and the so-called Easter shift, which pushed most holiday-related sales into March. (The shift did buoy March 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, besting all other sectors. Better yet, May retail figures showed a 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.

But it seems that since the selling started, investors have not been eager to stop. As of June 22, most retail REITs are down for the year. 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 in negative territory.

"We think the selling is completely overdone at this point and business fundamentals across the spectrum--not just retail--remain very strong," says Richard Moore, a REIT analyst with RBC Capital Markets. "We don't see any reason for this sort of thing to continue. That said, there is momentum in play. So it takes some time for this kind of thing to reverse itself. That's kind of where we are."

There are some real reasons for the dip. 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 have 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."

Interest rates have moved back up as well. While they are not as high as they were at this point last year, the higher rates combined with concerns in the housing market and the fallout from the sub-prime mortgage market have combined to hit real estate values.

"And when you do that," Moore says, "it raises the cap rates of everybody; including the public guys. I think that's the heart of it."

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 been keeping records. But, that wasn’t the case. There were 1,916 closings during the quarter, just 201 fewer than 2006 and almost double the 999 during the first quarter of 2005.

And, in the second quarter another 617 closings occurred, putting the total at 2,533—more than in 2005 and virtually the same as last year.

While retail sales did rebound a bit in May, overall consumer spending softened. However, purchases of high-end luxury items was robust. 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 cater to the affluent market. Among the retail REITs in Merrill Lynch's coverage (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 posted total returns were down 3.8 percent for the year.

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

That may create buyout or merger opportunities. To date, though, private equity investors have eschewed retail REITs.

In the end, it is not clear whether retail REITs will return to their 52-week highs anytime soon, even though the 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."

—David Bodamer