Retail properties represent the front line on the battlefield that is the real estate market. When operating conditions take a turn for the worse, more often than not the retail segment is the first to feel it, since consumer spending on discretionary items is more easily reduced than expenditures for housing or office space. Indeed, the wave of bankruptcies during the recent recession disproportionately affected this sector, claiming retailers such as A&P, Circuit City, and Fortunoff, while leaving others like Borders Group (BGP) hanging on for dear life. In turn, retail REITs experienced a sharper selloff than average for the broader REIT universe. But now that the worst has seemingly passed, and conditions continue to stabilize, do retail REIT stocks present a good buying opportunity?

The retail real estate segment has undergone significant changes over the past 30-plus years. Although major shopping malls are now the norm, there was a time when consumers bought most goods at small local stores along Main Street. However, starting in the mid-1970s, two developments permanently changed that landscape: the advent of the regional shopping mall and the rapid growth of ‘’big-box’’ retailers.

Typically anchored by large, national department stores surrounded by smaller specialty shops, the malls of today are equipped with movie theaters, food courts, and bowling alleys, among other amenities. With so much to do under one roof, these all-in-one centers have become more than a place to satisfy your basic needs; they’ve become a destination onto themselves. Shoppers are encouraged to come early and spend the day, often with family in tow.

Founded in 1993 when the Simon brothers decided to take their vast empire public, Simon Property Group (SPG) has executed this game plan better than most—if not all—of its peers. In fact, Simon is currently the largest real estate company in the U.S., owning about 340 properties valued at roughly $30 billion, spanning 41 states and seven countries.  To put that in perspective, Simon’s market capitalization, at approximately $29 billion, is nearly double that of either Boston Properties (BXP), Public Storage (PSA), or Vornado (VNO), three of the premier REITs in the country and owners of substantial office and storage space. Other noteworthy mall operators include Developers Diversified (DDR) and Pennsylvania REIT (PEI).

On a slightly smaller scale, neighborhood shopping centers are usually built around a supermarket and a drugstore, filled out with basic services, such as dry cleaning, takeout food, and a barber shop or beauty salon. Formed in 1962, and currently one of the oldest REITs in the country, Federal Realty (FRT) has amassed about 85 properties across 13 states and the District of Columbia, with real estate assets valued at just under $3 billion. The company’s focus on high-quality, well-located properties has helped make it the leading owner of supermarket-anchored shopping centers in the U.S. Federal’s closest competitor in terms of size is Kimco Realty (KIM), which operates properties in nearly every state, as well as Canada, Mexico, and Puerto Rico. Concentrated in the southern half of the country, Weingarten Realty (WRI) is another large owner of neighborhood centers, with substantial holdings in the Houston area.

Although shopping malls dramatically changed the way Americans interact with the retail environment, perhaps no phenomenon played a larger role in the demise of Main Street than "big-box" retailers. These massive, warehouse-like superstores were popularized by global retail giant Wal-Mart (WMT – Free Wal-Mart Stock Report), as well as specialty retailers, such as Best Buy (BBY), Costco (COST), and Dick’s Sporting Goods (DKS). Realty Income Corp. (O) is the leader in this space, owning one of the largest portfolios in the country in terms of number of properties. The company has become one of the steadiest operators in real estate by spreading its risk over more than 2,340 properties, catering to 32 distinct retail business types, and scattered across 49 states. 

Although stocks of retail REITs suffered steep declines during 2008, it’s been a different story in the two years since. Indeed, the average share price among the seven retail REITs under Value Line coverage has improved more than fourfold since early 2009, outpacing the broader market indexes over that time frame. While that is encouraging news for the financial viability of these property owners, long-term appreciation potential here is limited. In fact, the only members of this segment with noteworthy upside potential are Developers Diversified and Penn REIT, but both come with well above-average levels of risk. Those accounts stressing current income should take a look at Kimco and Realty Income, though venturesome investors may also want to consider Penn REIT.

At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.