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.

Investors continued to buy retail properties in spite of rising interest rates, poorer than expected sales performance and announcements of store closings by some of the market’s 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. Meanwhile, 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. The survey also sited limited supply of available properties as the possible reason for the drop-off.

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--whereas last year they were looking to put five percent in, now they are looking to put in 10.”

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 they were cutting back on jobs in expectation of lower profit margins.

As consumer debt mounts, economists predict the sector will experience a slowdown. In the past few years Americans have been refinancing their homes and going on massive shopping sprees with the proceeds, but with the rising interest rates and volatile oil prices, they won’t be able to afford to do so for much longer.

In addition, existing retail properties will have to compete with newer product. According to the Korpacz Survey, shopping center vacancy will grow by 377 million-square-feet in 2006, an almost six percent increase. That will widen the gap between asking prices--which have been set at premium levels – and what buyers are willing to pay.

Howard Davidowitz, chairman of Davidowitz & Associates, Inc, a national retail consulting and investment firm based in New York, believes that investors might be buying retail properties with the long-term view of converting them to mixed-use. He brings up the example of the recent sale of the 656,000-square-foot Filene’s Basement store in Boston to Vornado Realty Trust for $100 million.

“There is a mixed bag out there, when you look at the sale in Boston and how quickly Federated [sold] that store for a pretty nice price and then you look at the lousy prices Winn-Dixie has been getting,” he says.

“Everybody expects the consumer to slow down, and that’s why you see people paying high prices for prime retail locations – because a lot of them can be converted to mixed-use. It’s happened at a 100 places, but you are not going to be able to do that with secondary properties.”

Elaine Misonzhnik