Store closings will continue to outpace openings and rents will persist in a downward spiral, driving some shopping centers into foreclosure as the Valley's job market continues to shrink.
That's the grim assessment of the Valley's retail sector from Marcus & Millichap Real Estate Investment Services. The firm's third-quarter Retail Research Market Update said woes in the Valley's retail real estate sector will persist for the remainder of 2009.
Although job losses slowed in the second quarter, those losses will still continue, prompting consumers to hold firmly onto their wallets. The Valley has shed jobs at twice the national rate since the economy went south, according to the report.
"We're seeing everybody in the economic chain around retail properties just being hammered by all these different occurrences," said Sanford Burstyn, a Marcus and Millichap retail broker.
Researchers at the firm forecast that the overall job market will shrink 5.8 percent this year, or by 104,000 workers. Last year, the job market shrank by 111,200 jobs.
Those losses and the persistent woes in the residential real estate market will drive rents down 7.3 percent from last to $15.84 per square foot.
The report went on to say that although the amount of newly constructed retail space in 2009 is expected to fall from 7.2 million square feet in 2008 to 2.9 million square feet in 2009, vacancies will keep creeping up as landlords struggle to replace closing stores. It said the threat of more Bashas' closures "could impact valuations considerably among neighborhood centers anchored by Bashas' and Food City stores." Bashas' recently entered Chapter 11 bankruptcy.
According to the report, the Mesa, Chandler and Gilbert submarket has the highest vacancy rate in the Valley at 12.6 percent. That will only increase as nearly 1.2 million square feet of space under construction starts to come online.
Retailers are struggling to make current rent payments due to rising unemployment and an ongoing retrenchment in retail sales. Sales dropped about 12 percent in the last year.
Because of a glut of space and less demand, rents are coming down and owners aren't able to make mortgage payments, Burstyn said.
"If they're not able to renegotiate those with the lenders or come up with more money ... then those deals are going to get foreclosed on and get recycled out into the market," he said.
Burstyn said this scenario has been playing out across the Valley for about a year now.
"It's really unprecedented, and it's continuing because we're seeing tenants who came back and renegotiated leases and are coming back a second time," he said.
"It's not like the tenants are trying to hurt the landlords," he added. "They're just reacting to the lack of consumer spending that's impacted from job loss and credit restraints."
Burstyn said foreclosures will hit two categories of owners, those who bought at the top of the market or put maximum debt on the properties.
Bob Kammrath, a Phoenix real estate expert, said he expects that about half of those owners who financed shopping centers over the last five years or so will lose their properties to foreclosure.
That includes those who took out loans to acquire existing shopping centers.
"And the reason of course will be because values are falling and the loan was based on a ratio of probably an appraised value at that time," he said, adding that it isn't surprising to find properties going for 50 cents on the dollar.