Tickers in this Article: IYR, CBG, RTL, SPG, KIM, O, NNN, DDR, TCO, VNQ
While commercial real estate has bounced back nicely since the depths of the recession- broad measures of the sector like the iShares Dow Jones US Real Estate ETF (NYSE:IYR) have put up quite impressive returns- the retail sub-sector hasn’t fared as well. Driven by cost-cutting consumers and high unemployment, firms operating the shopping and strip mall space have been left behind. However, various pieces of sector data are pointing in the positive direction, things may be finally turning the corner for the retail REITs.

Rising Sales and Slowed Construction

After getting trounced during The Great Recession, the retail real estate space spent much of the last two years floundering. However, things are finally looking up for the market.

First, sales of strip malls, community power centers and other shopping destinations are beginning to grind forward. Nearly, $10 billion worth of retail property investment sales occurred during the first quarter of 2013. That’s a significant increase compared to recent quarters. This includes a 30% year-over-year increase in the sales of strip malls. Perhaps more importantly, secondary markets in hard hit areas- like Florida, Phoenix Denver- have begun to see renewed sales activity.

Secondly, after a torrid pace of new retail outlet construction, activity in the sector has slowed to a crawl. According to consultancy PricewaterhouseCoopers (PwC), retail remains still a speculative bet for those firms providing financing. As such, the only projects that are currently getting built are those that were started before the recession.

These increasing sales, along with a constricted construction environment is helping boost rents and returns for property owners. Recent data from real estate services giant CBRE Group (NYSE:CBG) showed that the U.S. retail market continued to improve in the second quarter as the national availability rate decreased a year-over-year basis. Overall, that key metric of available retail real estate fell to just 12.3%. That’s helped shopping mall, power centers and freestanding retail store owners realize one of the best annualized total returns of all other property types on an unlevered basis during the quarter.

Yet, there’s still time for regular investors to cash in on the trend.

Buying A Power Center

Given the recent bullishness in the sector, it may be time for investors to give the retail real estate sector a go. For investors looking for a broad way to add a swath of retail commercial real estate to a portfolio, the iShares FTSE NAREIT Retail ETF (NYSE:RTL) could be a good bet. The ETF tracks 33 retail REIT heavyweights including Simon Property Group (NYSE:SPG) and Kimco Realty Corporation (NYSE: KIM). The fund yields a healthy 3.44% and only costs 0.48% in expenses. However, the main drawback to the fund is that it hardly trades. For a retail REIT-oriented portfolio, the best bets are in individual choices.

Two of the best bets could be triple-net stars National Retail Properties (NYSE:NNN) and Realty Income (NYSE:O). At their core, a net lease requires the tenant to pay not just rent but also some or all of the property expenses that normally would be paid by the property owner. Both O and NNN have used this to their advantage across their enormous retail property portfolios. That’s resulted in some high dividend growth as well as high current yields. National Retail Properties currently yields 5.2%, while monthly dividend payer Realty Income yields 5.6%.

Another prime pick could be DDR (NYSE:DDR). The firm- formally known as Developers Diversified Realty- was one of the largest power center operators in the country, with assets valued at 49 billion in 2009. However, as the recession took hold, DDR faced hard times on the refinancing front and saw its stock price plummet down about $2. Since that time, the firm has refocused by selling non-core properties, paid down debt and has risen from the ashes. Shares of DDR have performed well over the last few years and shareholders have been rewarded with dividends. DDR currently yields 3.48%.

The Bottom Line

As commercial real estate rebounded from the depths of Great Recession, the retail sub-sector was left behind. However, the sector is now showing some real signs of life. For investors, it could finally be time to bet on the beleaguered strip mall and power center operators. The previous firms- along Taubman Centers (TCO) –make ideal ways to play retail real estate’s rebound.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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