The little upside left in the retail real estate market is being reflected in weakening prices for the sector as investors put money in other office, multi-family and industrial real estate.

In the second quarter of 2006, average sales price per square foot dropped 9.3 percent, from $208 to $194, and pre-tax yields decreased 10 basis points for retail properties, according to a report from Real Estate Research Corp. and Certified Commercial Investment Member Institute.

But all is not lost yet, according to Mark G. Dotzour, chief economist and director of research at Texas A&M University. Dotzour advises real estate owners to hold on to their properties — because investment in the sector will continue to grow in the next few years as corporate America looks for a safe place to put its $560 billion in funds.

And after witnessing the great returns real estate can generate, Dotzour predicts a number of players that previously had limited interest in property — such as pension funds, university endowments and municipalities — will join the bandwagon after getting low returns on their investment in stocks and bonds.

“Money is coming from everywhere and we're on a new wave of construction in commercial real estate because it has nowhere else to go,” Dotzour said at ICSC's Capital MarketPlace conference in New York on Sept. 21. “So keep holding your real estate until Wall Street can offer an alternative that looks good again.”

There is a risk, however, that the industry will hurt itself with overbuilding. Dotzour notes that in the past few years there has been a preference for trading new developments that offer higher cap rates than comparable existing product, even though the market cannot support an unlimited supply of new projects.

He also cautioned that the Federal Reserve is likely to raise interest rates in 2007. Economists believe that an inverted yield curve, such as exists today, is a reliable predictor of an impending recession and Dotzour expects Federal Reserve chairman Ben Bernanke to take measures to try and prevent that.