Best deals of cycle may be retail real estate.

Retail property may be investors' best hope in the current real estate cycle. The supply of high-quality suburban office buildings, industrial warehouses, and apartment projects is thinning, and investment opportunities are becoming limited in many markets.

Retail transactions started the year slowly compared with other property types, except for grocery-anchored strip centers. "This could well change by year-end," says Peter F. Korpacz, MAI.

If retail does make a comeback with investors this year, lower prices will be a significant contributor. Regional malls in general are priced lower than they have been in many years, and this year could be a better time to acquire regional malls than any time in the recent past.

Many regional malls experienced significant value declines during 1995 and 1996. In addition, although price, are already low, participants in the Korpacz Real Estate Investor Survey forecast only a slight increase in prices this year - around 1 percent.

"If I had to say that one property type is underpriced today, I'd say it's retail," Korpacz said. Clearly, over the past year of two, investors have not looked at retail properties as aggressively as other property types. Instead, they pursued suburban office buildings and industrial and apartment properties. "Now, with bargains disappearing in these property markets, retail may be the best prospect for upside potential," said Korpacz.

Investor interest in regional malls is definitely on the upswing. Even with retail sales growth that is lower than in the recent heyday, good malls produce satisfactory income. "Many of our participants believe that the crisis in the retailing industry is past," said Korpacz. "Therefore, income is perceived to be more reliable."

While some investors have cooled on power centers, there is still a significant amount of interest in the property type albeit from a smaller pool of investors. "Even at the peak of investor interest, however, the pool of potential buyers was smaller than that for regional malls and strip shopping centers," Korpacz explained.

Investors have specific criteria for power center acquisitions. They must have a tenant roster of the dominant retailers in the particular category, not those that are third or fourth in market share; they must be positioned in high-growth markets in terms of population, employment, and income; and the location must be A+.

Prices for power centers are down from a year ago. Korpacz Survey participants forecast an additional 1.25 percent decrease over the next 12 months.

"The really hot retail property type is the neighborhood center," said Korpacz. "Currently, there are more buyers than available properties, firing up competition." He reports that buyers, especially REITs, are concerned that they may not be able to fill. their year's quota of planned acquisitions.

Among the reasons Korpacz gives for the popularity of neighborhood centers with investors is that their tenants provide goods and services that satisfy immediate needs. In addition, they are conveniently located for shoppers, most of whom live within a 10-mile radius. This convenience is a significant factor for time-pressured consumers. The most important element in the acquisition decision is that a center have the market's "A" grocery store to generate traffic for the other tenants. Since this is not the case for all centers, the Korpacz Survey participants forecast an average 2.12 percent decrease in prices over the next 12 months for strip centers in general.