Retail properties have topped thefor investor interest in the past few years, but all that might seems to have changed in 2006.
Sluggish consumer spending, rising cap rates and an excess of supply contributed to the sector's poor performance in the second quarter of this year. According to the Real Estate Research Corp. (RERC) and Certified CommercialMember (CCIM) Institute Investment Trends Quarterly, retail properties were on the bottom of the list for investment potential this spring, with regional malls trailing neighborhood shopping centers and power centers. Retail properties lagged behind properties in the office, industrial and residential sectors. RERC/CCIM reports that availability in the retail sector continues to increase, with vacancies across retail property types hitting 8.5 percent, up from 7.6 percent in the first quarter.
The average price per square foot also dropped in the second quarter, to $194 during the second quarter from $208 during the first quarter, a decline of 9.3 percent. Meanwhile, pre-tax yields went down 10 basis points. On a scale of 1 to 10 representing market conditions, neighborhood community centers received a grade of 5.6, power centers got a 5.0 and regional malls were rated 4.6, in stark contrast to the first quarter when those numbers were 40 to 90 basis points higher.
Overall, the sector rated at 4.6 on the 10-point scale.
“In part, this is due to the slowdown in retail sales in some areas because of an increase in housing costs, as well as the rising cost of fuel,” the CCIM report says. “With these factors not expected to improve greatly, the retail sector is likely to see continuing availability increases.”
Additional reasons for the change include overpricing and limited growth potential in the sector. National GDP growth slowed to 2.5 percent in the second quarter from 5.6.