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Report: U.S. retail development to slow in 2009

By Jerilynn Caliendo
March 30, 2009

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Encino, Calif.--With both consumer demand and financing drying up, developers are putting the brakes on new retail centers this year, according to the latest report from real estate investment firm Marcus and Millichap.

The firm predicts that only 90 million square feet of retail space will open this year, compared with 131 million square feet last year, marking the lowest amount of development since 1995.

New mall development is also slowing, according to Marcus and Millichap, with only 6 million square feet slated nationwide this year.

This slowdown will help stabilize the market in 2010 before a recovery starts in 2011, the firm said in the report; however, it will not stem the tide of vacancies. According to Marcus and Millichap, U.S. retail vacancy will increase by 180 basis points to 10.2 percent this year, following a 120-basis-point increase last year.

Meanwhile, the firm says rents at average retail centers will decrease 4.5 percent this year, after holding steady last year. Effective rents slipped 1.1 percent last year and are expected to drop 5 percent this year. Many oversupplied markets will record steeper declines.

According to the firm, most of the distress in the market last year was tied to maturing debt, but falling occupancy and rents will further compound things through this year.

Marcus and Millichap considered some $10 billion of U.S. retail assets distressed at year-end 2008, with an additional $24 billion at risk. The rising number of distressed properties has caused buyers to expect deeply discounted pricing, even for properties that are operating soundly, the firm says. Outside of top-tier assets in prime locations, the expectations gap between buyers and sellers remains fairly wide, the firm says, though it does appear to be closing.
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