By  on January 8, 2007

The running of the bulls will continue in 2007 — the bulls, of course, being retail REITs. According to the National Association of Real Estate Investment Trusts, the retail sector earned returns of 29 percent in 2006, with regional malls bringing in 23.8 percent and shopping centers a whopping 34.9 percent. Retail wasn't even the highest earner among the REITs, a designation that went to the office segment, with 45.2 percent returns.

But still, retail REITs are "one of the cheapest in the REIT sector," according to Ross Nussbaum, senior equity analyst for Bank of America. In his predictions in the 2007 Retail REIT Outlook, Nussbaum touts the strength of the retail REIT market and its relative value. Consider it buying designer goods at a discount.

"We see continued strong demand for Class A mall space, driven by a record number of new store concepts and continued square footage growth from healthy existing retailers," writes Nussbaum. "Consumer spending has also held up better than we had anticipated, which should keep store closings and bankruptcies low."

In addition to a secure consumer — buoyed by lower energy and borrowing costs and a stabilized housing market — the retail industry is better capitalized than it has ever been. "The recent wave of private equity into weak retailers, with the objective of monetizing embedded real estate value, has reduced bad debt experience for the landlord and has allowed landlords to green-light square footage expansion for retailers who otherwise may have been a credit risk," he says.

Nussbaum expects new specialty concepts, luxury retailers, restaurants and international retailers to pump up demand for new space, with a total increase in square footage for apparel retailers to rise to 3.8 percent in 2007 compared with 2.1 percent last year.

REITs, in turn, have ramped up their redevelopment pipeline, but are holding themselves in check in terms of new development, barring a few major new projects. Those include Simon Property Group's 700,000-square-foot Domain in Austin, Tex., due in March; General Growth's 1 million-square-foot Shops at Fallen Timbers in Toledo, Ohio, due by the end of the year, and Macerich's 1.2 million-square-foot SanTan Village in Gilbert, Ariz., whose first phase is expected to open in the fall.

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