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Economic Research

EconSouth Stiff Headwinds Blow Through Retail Spaces

Across the Southeast, vacant retail space and empty parking lots are a reminder of the consumer spending and development boom that preceded the recession.

In "Stiff Headwinds Blow Through Retail Spaces," featured in the second quarter 2010 issue of EconSouth, staff writer Charles Davidson explores the reasons behind the region's vacant shopping centers. Some of the reasons are relatively straightforward, he says, while others are more subtle, but what it really boils down to is a mismatch between supply and demand.

A plentiful supply of financing and strong consumer spending helped fuel the boom in retail real estate, and the recession reversed these trends. Other factors are also affecting the region's shopping centers, Davidson notes, including shifting patterns in shopping and traffic. For instance, consumer preferences are leaning away from enclosed shopping malls in favor of "lifestyle centers" modeled after traditional downtowns.

The troubled retail property market has put the region's lenders, especially community banks, under pressure. Falling retail rents have depressed values at a time when many loans will soon come due. As a result, some borrowers may have difficulty refinancing their loans. A wave of loan losses could be troublesome for the region's banks that engaged heavily in commercial real estate lending.

As a result of the commercial real estate challenges, many banks have tightened their standards on CRE loans, says Davidson, causing even solid projects to be put on hold due to lack of financing. But given the current glut of retail space, the reduction in new properties coming on board is actually a good thing, according to industry experts.

Improving economic conditions will also go a long way to restore the balance between supply and demand, says Davidson. Improvements in the employment situation and stronger consumer spending will help boost retailers' fortunes. Despite some early signs of recovery, he says, "the forlorn parking lots and hollow retail shells appear likely to be with us for some time."