Retail Risk Trails Other Sectors in CCIM Survey, But Roots Remain Strong

The return and value of retail assets has recently slipped relative to other categories, according to a recent survey of CCIM designees and candidates. Given consumer worries about high prices and the burdens facing retail tenants, the survey results come as no surprise, said Kenneth Riggs, president & CEO of Real Estate Research Corp. “The message they’re sending is that (these conditions) will continue at least for the next year,” RIggs said. RERC conducted the study in association with the CCIM Institute, an educational affiliate of the National Association of Retailers.The RERC/CCIM Institute study found that respondents consider the retail sector the riskiest of the five major property types relative to potential return. On a scale of 1 to 10, retail properties earned a 4.5 score for return vs. risk. Retail properties trailed office (4.6), hotel (5.0), industrial (5.2) and apartment (6.3).  The retail sector’s rating, which reflects the second quarter of 2008, has slipped from the 5.9 score registered during the second quarter of 2007. The office sector sustained the second-biggest decline, sliding from 5.6 to 4.6 year-over-year. Overall, the cumulative risk-return ranking for the five property types fell from 5.8 in the second quarter of 2007 to 5.1 in the second quarter of 2008.Asked to rate property categories for value vs. price, the respondents again gave retail assets the lowest grade–4.3, just behind the office category, which received a 4.4 score.  Even so, confidence in other property types has declined by similar degrees. For example, the hotel sector’s grade has slipped from 5.3 at midyear 2007 to 4.6 in the second quarter this year.  Besides consumer concerns and retailer struggles, retail’s fast recovery after the 2001 terrorist attacks may explain its relatively low marks now, Riggs explained. “Retail moved earlier and moved stronger than other property types,” he said.Despite the sobering outlook, Riggs emphasized that structural changes in the retail real estate sector provide the foundation for a strong comeback. “I would say that the retail industry is, all in all, in good shape,” he said. Like other property types, retail has avoided overbuilding, in contrast to the late 1980s and early 1990s. Since that downturn a generation ago, retail investors have also established a stronger connection to the retail marketing side in order to help their tenants. That strategy, along with years of consolidation, has strengthened REITs like General Growth Properties Inc. and Simon Property Group Inc. Although those giants account for only a part of the retail real estate market, the changes they have helped engineer are a big reason that the sector is basically sound, Riggs contended.