A potential retail development slump

Mixed-use developments (generally residential & retail) have become popularized over the last decade because cities like the tax revenues from retail sales and home buyers enjoy the convenience of stores within walking distance.

However, retail development also tends to follow housing sales, and now it seems retail absorption may be slowing in certain markets. Writing in the Wall Street Journal, writer Kris Hudson explains:

Sparked by the housing boom across the country, shopping-center and mall developers have gone on a tear in recent years, delivering millions of square feet of new space in Phoenix, San Antonio, Cleveland, Tampa, Fla., and numerous other markets. Since 2005, developers in the U.S. have produced more retail space than office space, rental apartments, warehouse space or any other commercial real estate category.

But just as that new space is hitting the market, demand is declining. Mounting home foreclosures have sapped the strength of previously hot markets like Phoenix and California's Inland Empire near Los Angeles, leaving retail-property owners with rising vacancies and slower leasing rates for new space. And anemic sales gains in the just-completed holiday season fell short even of the retail industry's tepid preseason forecast...

Retail development is "basically at a three-year high," says Steven Marks, chief of research on real estate investment trusts at Fitch Ratings Inc. "And that three-year high is at a point in the economic cycle where it's probably not the best time to be developing right now..."

The Phoenix area's outlook has developers retrenching. Simon Property Group Inc., a mall REIT, recently wrote off its $26 million early investment to co-develop a mall in suburban Phoenix. Glimcher Realty Trust last year dropped an option to co-develop a mall on 100 acres in the suburb of Surprise. Among the projects whose openings have been pushed back by a year or more at the insistence of anchor tenants are a DeBartolo Development LLC shopping center anchored by a SuperTarget and a Wal-Mart-anchored project. Both retailers say they will hold off on those projects until the surrounding area's population growth justifies them.

The story is similar in California's Inland Empire, another fast-growing market now besieged by foreclosures. The area, which includes San Bernardino and Riverside, is expected to have construction totaling more than 11 million square feet over this year and last, the most there since the late 1980s. Retail vacancies, now at 12.8%, are forecast to hit 15.5% by the end of 2011, according to Property & Portfolio Research.