A Retreat From Retail

Consumer Slowdown Dashes Big Plans

Not long ago, developers at Madison Marquette envisioned capitalizing on the influx of affluent residents flocking to Charles County by rebranding their 20-year-old strip mall, Festival at Waldorf, as the upscale Shops at Waldorf Center.

They were going to build 100,000 more square feet of space, with lavishly landscaped walking paths and stylish boutiques and eateries. They cleared about 10 acres of woods adjacent to the mall and shopped the idea around the country to select national retailers. Interest was strong, and offers from potential tenants poured in for a late 2008 opening.

But now, the storm water pipes stacked neatly on the site and a large sign seeking leasers are the only evidence of expansion. Many of the retailers backed out when the bottom fell out of the economy. So a few months ago, developers postponed construction, opting to build the project in phases over two years.

The slowdown in consumer spending, along with the housing meltdown and credit crunch, are putting the brakes on retail expansion projects in the region, which had been one of the hottest commercial real estate markets in the nation. Developers here and across the country are postponing, scaling back and even canceling retail projects. And those with new sites are finding it increasingly difficult to sign tenants that have enough capital to not only finance the interior construction but to pay the rent.

Retail, which represents almost a quarter of the 800-million-square-foot commercial real estate space in the Washington area, has been hit much harder than the office and warehouse segments of the industry because of the troubles national chain stores are facing, experts say. About 2,200 retail jobs were lost in the region this year, experts say.

Retailers "saw their sales slowing regionally and around the country," said James M. Farrell, principal of the Madison Retail Group, the commercial leasing division of Madison Marquette. "As time went on, they saw that trend accelerating and they said, 'It does not make sense for us to commit to new stores at this time.' "

"What we were not going to do is 'build it and they will come' -- a 'Field of Dreams' kind of thing," Farrell said, something many developers did during the real estate boom. The company opted to postpone start of construction until early next year, he added, "given what we're hearing from a host of retailers."

Construction of new retail space in the United States from January to July fell by more than 37 percent compared with the same period in previous years, according to the International Council of Shopping Centers. Expansion of auto dealerships, restaurants, department stores and other retail operations was off substantially. But supermarket growth was flat and drugstores expanded by more than 18 percent, reflecting consumers' shift from spending on wants to spending on needs.

The Midwest suffered the most, as retail construction dropped 45 percent. The South, which includes the Washington region, experienced a 37 percent reduction.

That outlook is not expected to improve much in the near future, with moves by several retailers, including Linens 'n Things, Circuit City and Starbucks, to close stores and announcements by Target, Staples and Wal-Mart to reduce the number of stores they will open.

"More recently, you started to see more weakness -- projects are delayed and a lengthening of the construction process -- reflecting the unavailability of money," said Michael P. Niemira, chief economist and director of research at the shopping center council.

"Small strip centers tend to be the most hard hit," Niemira added. "Mom-and-pop stores are affected first."