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Retail REITs: Trouble Ahead

NEW YORK (TheStreet) -- Industry trends in the retail-focused real estate investment trust sector have been improving, but trouble may yet be on the horizon.

Real estate investment trusts in the retail sector have suffered in recent years as consumers' cutbacks in discretionary spending led to softer demand for retail space. Many retail-focused REITS suffered through tenant bankruptcies and store closings, and some reduced the rents they charged to keep retailers.

While firms such as Developers Diversified Realty (DDR), CBL & Associates Properties (CBL) and Simon Property Group (SPG) have reported improving occupancy and rental trends in their recent quarterly reports, there remains a few key obstacles for REITs that rent space to retailers. Perhaps the most important is consumer confidence.

The Thomson Reuters/University of Michigan index of consumer sentiment rose to 68.9 in August, from an eight-month low of 67.8 in July, but the uptick was less than expected. Soft consumer confidence often leads to pullbacks in consumer spending which is widely considered to account for 70% of the U.S. economy.

High rates of joblessness could mean the recent recovery in the REIT-retail sector was simply an anomaly, and not indicative of fundamental strengthening, according to equity research shop Stock Call.

Excluding auto and gasoline sales, U.S. retail sales fell 0.1% in July, though overall retail sales rose 0.4% last month after falling the previous two months.

Retail behemoth Wal-Mart Stores (WMT) also poses a potential threat to retail REITs, the research firm noted.

Wal-Mart has been expanding into the grocery business, posing a threat to grocery store chains like Kroger (KR) and Safeway (SWY). Grocery stores are generally the primary traffic anchors for retail developments and strip malls, Stock Call pointed out, and Wal-Mart's growing grocery business could steal grocery shopper traffic away from higher-priced chains.

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