Investors changing perception of Retail

During the downturn of 2002-2003, many investors fled to retail shopping centers with good traffic and demographics feeling that people may stop buying many non-essential goods, but that “they will always buy groceries.” 

However, during the current downturn, even this notion is undergoing examination. The volume of retail income properties sold as investment sales was down 81% in the first half of 2008 compared to the same period last year and retail store closings are at a six year high. Thomas Buxton, president and CEO of Fort Worth, Texas-based Buxton Co. believes that many retailers went out of business due to too broad demographic profiles. Is this perhaps due to retail trade areas being re-defined due to rising gasoline costs? Another view is that retail is overvalued due to many 1031 investors searching for a ‘safe’ investment. Some analysts believe that cap rates for retail properties are 25 to 50 basis points above (meaning a lower cap rate) where the market should be and creating an over-inflated value compared to office and industrial income properties. 

Whatever the cause, it is certain that the retail investment market over the past several years was very hot and is currently cooling. Many investors like retail, because they are personally familiar with it—after all, everybody shops. Perhaps it is time to re-consider different options when it comes to income properties until the retail sector shakes itself out. Chances are it will be a quick ‘recovery.’