The Recessionary Noose is Tightening

As each day passes, there's more and more evidence that the recessionary noose is tightening.

From the housing sector, to the auto industry, to the restaurant business, to retailing, to companies involved in transporting goods of all kind throughout the U.S., the list of those being hurt by a slowdown in spending appears to be expanding at an accelerating pace.

In "Strip-Mall Vacancies Hit 7.4%," the Wall Street Journal reports on yet another problem area in the making.

Weak Housing Sales Nudge Rate to Highest Since 2002; Consumers Rein In Purchases

U.S. strip-mall vacancies only inched up in the third quarter, but still hit a 5½-year high, spurring concerns about cutbacks in consumer spending. Rentals of retail space in weak housing markets are getting hit disproportionately hard, as consumers rein in their purchases.

The retail sector has been a pillar of the commercial real-estate industry -- and the overall economy -- for the last seven years, riding out economic downturns on steady consumer spending strengthened by soaring housing prices and easy credit. The end of the housing boom and the current credit crunch have analysts and investors watching for signs of weakness.

"There's uncertainty in the market, and there's uncertainty on the part of retailers as to how consumers will respond to the changing conditions," says Sam Chandan, chief economist at Reis Inc., a New York real-estate research firm.

The strip-mall vacancy rate rose to 7.4% in the third quarter, from 7.3% in the second quarter and 7% in the year-earlier period. Along with the first quarter of 2002, when the vacancy rate was also 7.4%, that level was the highest in 11 years, according to a survey of 76 U.S. retail markets by Reis.

In states such as Florida and California, where housing markets are among the weakest in the country, retail fundamentals have markedly softened in some places. In Sacramento, Calif., the strip-mall vacancy rate has jumped to 6.3% in the third quarter from 4.5% in the year-earlier period. Quarterly rent growth in the last nine months was an average 0.3%, compared with 2006's average growth of 1.4% a quarter.

In Orlando, Fla., vacancies hit 5.7% in the third quarter, from 5.1% in the year-earlier period, while rent growth has averaged 0.6% in the first three quarters this year, down from an average 1.1% last year.

In Roseville, Calif., outside Sacramento, strip malls are particularly struggling in areas where many new homes were built in the last few years, says Bob Nolasco, a senior vice president with Grubb & Ellis, a Chicago-based commercial real-estate firm. "It's a combination of a glut of unanchored centers that have drawn in lower-credit tenants, [as well as] the housing market," he says, noting that housing construction there is about half what it was at its peak.

Vacancies have also risen and rent growth slowed in weak housing markets such as Miami, Tampa, Phoenix, Orange County, Calif., and San Bernardino/Riverside, Calif.

Retail in most of the rest of the country is still solid. "Between the coasts, we're not seeing as much of an impact, because that's not where a lot of the [housing] prices were inflated," says Greg Maloney, chief executive of retail at Jones Lang LaSalle, a Chicago-based commercial real-estate firm.

In Florida, sales-tax collections have slipped, signaling falling spending. August sales-tax collections were down 2.7% from a year earlier, while July's were off 6.1%, according to the Florida Department of Revenue.

Some retailers have tapped the brakes on expansion plans, according to several real-estate executives. The home-furnishings area is particularly weak. Mr. Nolasco says furniture sales in Roseville are off 40% to 50%.

Mall anchor tenants such as home-improvement retailers Lowe's Cos. and Home Depot Inc. have seen falling same-store sales that affect the smaller shops adjacent to them as traffic decreases. In Boca Raton, Fla., banks have slashed their leasing activity for new branches, says Russell Bornstein, senior vice president with Grubb & Ellis.

Still, some retail real-estate executives see little effect from the turmoil. "The consumer has been amazingly resilient, and when you combine that with the strong fundamentals of retail real estate, we are still cautiously optimistic," says Daniel B. Hurwitz, chief financial officer of Developers Diversified Realty Corp., a Beachwood, Ohio, real-estate investment trust that buys and develops strip malls.

In San Diego, growth in retail rents actually increased in the first three quarters of this year over last year, despite that market's falling housing prices and higher delinquencies. Quarterly rent growth has averaged 1.7% so far this year, compared with an 1.4% average last year. Space is still tight, with a vacancy rate of 3.1%, up from 3% a year ago.

Shopping-mall vacancies have shown no impact from the housing problems yet. Because of malls' long lease terms, economic problems typically take 18 months to 24 months to show up in vacancies and rents. The vacancy rate for shopping malls fell to 5.5% in the third quarter from 5.6% in the second, and rents rose 0.7%, according to Reis. Strip malls see the effects sooner, but ultimately could be more stable than shopping malls, which depend more on discretionary spending.