Retail properties continued to benefit from strong investor interest during the first half of 2006 — but demand for all types of retail was not equal, according to the Korpacz Real Estate Survey by PricewaterhouseCoopers. Power centers anchored by big box tenants were the most sought after properties during the quarter, while deals involving regional malls dropped sharply. Retail has remained popular in spite of rising interest rates, poorer than expected sales and announcements of store closings by some major players.
PricewaterhouseCoopers researchers found that regional malls, power centers and strip shopping centers are still experiencing high transaction volume in 2006, though the number of deals has decreased since last year. There were, for example, only 12 regional malls sold in the first quarter of 2006, compared to an average of eight a month in 2005. Sales in the strip shopping center sector decreased by 12 percent in the past 12 months, due in part to the competition from big box merchants and bulk warehouse retailers.
Susan Smith, editor of the Korpacz Survey, believes that interest in retail properties reflects investor's preference for all types of commercial real estate. She believes that buyers have to be more careful about doing their due diligence than they have been in the past couple of years, but retail real estate is still a pretty sure bet.
“From a supply and demand point of view, the sector continues to do very well,” she says. “And when you look at real estate compared to alternative investments, investors still see a very viable market. A lot of people are increasing their allocation to real estate.”
But the market's strong overall performance is somewhat surprising, considering there are increasing concerns about where retail is heading in 2006. Industry sales fell by 0.1 percent in June, instead of posting the expected 0.4 percent increase, according to the National Retail Federation. There were massive store closings this year, including 110 locations by OfficeMax, 75 by Toys ‘R’Us and 100 by Albertsons, while Home Depot scaled back expansion plans. Retailers also made headlines earlier this month when it became known that they were cutting back on jobs.
In addition, existing retail properties will have to compete with newer products. According to the Korpacz Survey, shopping center vacancy will grow by 377 million square feet in 2006, an almost 6 percent increase. That will widen the gap between asking prices — which have been set at premium levels — and what buyers are willing to pay.