As the Great Recession took hold, many investors found comfort and profits by playing the high-end consumer. Luxury retailers like Nordstrom (NYSE:JWN) became portfolio staples as American top earners were more immune from inflationary and recessionary pressures than other shoppers. Likewise, interest in tier one or class A malls surged as these high-end consumers continued to shop unabated. Featuring high per-square-foot sales, lower vacancies and retailers such as Neiman Marcus as their anchor tenants, class A malls have been the shining star in the retail CRE world. However, as investor interest has surged in the properties, yields have dwindled. Faced with these lower yields and rising retail sales nationwide, now could be the best time for investors to focus their attention and dollars on the second-tier.

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Rising Sales and Falling Vacancies
According to data provided by commercial real estate services firm Cassidy Turley, the United States retail sector reported its first vacancy decline in over five years as the market's recovery gained momentum. The group's May 2012 U.S. Retail Report shows that in the first quarter of 2012, the retail sector absorbed 3.1 million square feet of store space. That pace of absorption over the last six months is more than five times faster than any other point in the economic recovery. This has caused vacancies to fall 10 basis points to 10.9%. Cassidy Turley's report echoes similar findings from real estate analytic firm REIS Inc. (Nasdaq:REIS).

SEE: Analyzing Retail Stocks

This positive news, along with rising consumer spending and confidence data, has prompted a variety of private equity firms and real estate investment trusts (REIT) to begin focusing "down the food chain" towards class B or second-tier malls. Through its new real estate division, private equity giant KKR (NYSE:KKR) recently made a $196 million investment in a mall outside Chicago, as shopping centers lacking strong anchors remain a value.

The value in B malls, which feature anchor stores like J.C. Penney (NYSE:JCP), is being driven by the mall subsector's higher capitalization rates. Cap rates--which are a measure of gains for a property--for class A properties average 5 to 6%, while class B malls are in the 7.5 to 10% range. Investors are already getting a higher yield from these malls. However, adding in rising rent growth along with higher nationwide retail sales, and the B malls sector's real bargain begins to take shape.

Bet on the B Mall Players
While luxury mall operators like Taubman Centers (NYSE:TCO) have been given the green light by investors over the last few years, it may be time to focus on smaller second-tier operators. Growth in rental rates and sales, along with the sectors already higher cap rates, puts the B mall owners in a unique position to profit as the economic recovery continues.

SEE: The 6 Signs Of An Economic Recovery

Recently reporting that sales per square foot increased 5.3% to a record $376, Pennsylvania Real Estate Investment Trust (NYSE:PEI) could be a good starting pick. PEI's shares have climbed more than 18% this year as its 38 shopping malls have seen higher foot traffic and sales. Those higher sales have resulted in the company recently announcing a 6.7% increase in quarterly dividend. Shares of PEI yield a healthy 5.3%.

With sales rising at second-tier properties, a variety of mall REITs have gone on the acquisition binge. CBL & Associates Properties (NYSE:CBL) recently announced that it purchased the Dakota Square Mall from Lightstone Group for nearly $92 million. That property generated sales of $470 per square for the year ending in March and will help support CBL's 5.1% dividend. Also on the hunt is General Growth Properties (NYSE:GGP) recent spin-off Rouse Properties (NYSE:RSE). Focusing strictly on the B mall space, Rouse recently purchased the 589,000-square-foot, Grand Traverse Mall in Michigan. Overall, the purchase highlights the company's strategy of acquiring dominant properties in secondary markets

SEE: Understanding The Consumer Confidence Index

The Bottom Line
With retail sales beginning to show some positive trends, operators of second-tier and B malls are finally seeing their star shine. Rising sales as well as steady rent growth, in the face of higher cap rates makes the subsector a value in the world of commercial real estate. For investors, it could be time to bet on the B mall operators. The previous firms, along with Glimcher Realty Trust (NYSE:GRT) make ideal ways to play the strength in second-tier malls.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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