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Divining Retail Real Estate

Among a crystal ball, tarot cards and a ouji board, we don't know which, if any, is more accurate in depicting the sector and where we're headed.

We may need all three to determine where this economic market will take us and what toll it will have on the nation's shopping centers. We've already seen tightened credit, retail sales decline and vacancy rates rise.

Despite the malaise that has permeated the sector, the market's condition is not as bad as it was in the 1980s when owners dumped distressed assets onto the market that then sold at fire-sale prices. To the contrary, U.S. retail properties with stable cash flows are now priced at more affordable levels after coming off record highs seen over the past five years.

That, along with the weakening U.S. dollar, has prompted foreign investors to shop the United States for attractive deals. Toronto-based Brookfield Asset Management, Inc., a global asset manager with a $95 billion portfolio has launched a search for properties south of the Canadian border after browsing overseas markets for the past few years. A pair of Dutch financial firms, United Investment Company and SNS REAAL, formed a $1 billion fund to finance the development of small-scale retail projects in the United States.

Also, retail REITs flush with cash have taken the unconventional step of aligning with regional and local developers to provide construction financing for projects that would have never gotten off the ground. in this economy.

And, let's not overlook the retail sector's ability to innovate. At U.S. malls experiencing store closings, owners and operators now court and embrace new categories of tenants for their centers. Norton Healthcare Inc., has leased 16,500 square feet at Shively Shopping Center in Louisville, Ky. At Colonial Promenade at Hoover in Hoover, Ala., the Armed Forces Career Center now occupies a once-vacant storefront. And, a former Wal-Mart in Seward, Neb., is home for the parishioners of Hillcrest Evangelical Free Church.

Increasingly, enclosed malls have been redeveloped into mixed-use, open-air and lifestyle centers. Since 2005, enclosed malls accounted for just three of the 30 major shopping centers constructed. At more and more of those centers developers are incorporating green building design techniques coined “cradle-to-cradle” that offer the projects new commercial and residential uses after retail.

So, with the sector's demonstrated ability to adapt to change, one thing is clear using any of the aforementioned forecasting techniques: retail real estate will recover.

We look forward to seeing you here at ICSC RECon again next year.

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