Following the 9/11 terrorist attacks and the subsequent economic slowdown, Leslie Mayer reevaluated her business. For more than 14 years, Mayer had operated the Mayford Group, a boutique brokerage firm specializing in representation of retail tenants. Mayer wondered whether her Brentwood, Calif., firm would survive after 9/11. The loss of one key client might doom her business. She began to explore her options.

That exploration led Mayer to join New York City-based Cushman & Wakefield Inc. in 2004 as senior director of retail services in the firm's Los Angeles office; four years later, she is executive director of retail services. Today, amid another economic downturn marked by a housing slump, corporate layoffs and soaring gas prices, boutique firms like Mayer's former shop are undertaking the same sort of evaluation.

As retail sales and the leasing pipeline shrink, specialty firms with one or two marquee clients are pondering whether to team up with nationally recognized brokers such as Cushman & Wakefield. Boutique firms' clients, too, are thinking the same.

“Now, clients who relied on boutique firms like my own, before I affiliated with Cushman & Wakefield, are saying, ‘We love you, we want to work with you.’ But we need to go somewhere where they're going to give us everything so that we know we've covered all of our bases,” Mayer says.

As retail sales and leasing taper off from their torrid pace in 2006 and 2007, brokerage firms of all sizes are trying to cover their bases. Big firms are entertaining strategic alliances and merger propositions from smaller ones. Brokers are investing more time in strengthening ties with clients and cultivating relationships with potential clients. Some firms are shoring up their staffs to gird for what they anticipate will be pent-up retail demand in 2009 and 2010.

“Fortunes are not made in up markets. Fortunes are made in tight markets,” says Clay Smith, president of Addison, Texas-based Staubach Retail. “But those fortunes are realized in up markets,” he adds.

For now, brokers are coping with a down market. About 80,000 U.S. jobs were lost in March. The price of gasoline is projected to soar as high as $4 a gallon this summer. Sales of new and existing homes have plunged.

The retail sector has not been exempt. Same-store sales fell 0.5 percent at U.S. chain retailers in March compared with the same month a year ago, according to the ICSC. Wilsons The Leather Experts and the Sharper Image are among U.S. retailers closing stores. Meanwhile, retailers like Wal-Mart and JCPenney have trimmed their expansion plans.

That's bad news for leasing brokers and tenant representation specialists. Overall, the vacancy rate on retail properties is expected to rise 50 basis points this year to 10.2 percent, on top of a jump of 90 basis points in 2007, reports Encino, Calif.-based Marcus & Millichap Real Estate Investment Services.

Sales slowdown

Things aren't looking much better for investment sales brokers either. Fueled by sagging consumer confidence and a withered market for commercial mortgage-backed securities (CMBS), sales volumes are down. In January, investment in retail properties totaled $2.2 billion, the lowest monthly volume in four years and down 55 percent from the same month a year ago, according to New York City-based Real Capital Analytics. Compared with January 2007, sales of neighborhood centers also tumbled 78 percent. The downward trend is expected to continue throughout 2008. Industry sources also project cap rates for retail properties will climb 20 to 125 basis points this year.

New listings of retail properties were also down, totaling $4.4 billion, a 50 percent increase from a year earlier, according to Real Capital Analytics. Nevertheless, buyers and sellers are at odds over sales prices, meaning fewer deals are closing (see story on the bid-ask gap on page 146).

No one wants to slip up by purchasing a property now that could have a lower valuation in 60 to 90 days, says Larry Krasner, managing director of investment sales at Chicago-based Jones Lang LaSalle.

Whatever side of the deal you're on, trophy properties still command top dollar, observers say. “In uncertain times, people are looking to make safe bets,” says Bernie Haddigan, managing director of Marcus & Millichap's national retail group.

At the moment, retail centers in the$12 million to $20 million range are selling fairly well, Haddigan says, but deals in the $50 million-plus category are difficult to finance. Grocery-anchored shopping centers have proven especially popular among investors, says John Bemis, executive vice president and director of leasing at Jones Lang LaSalle's Retail Group. However, neighborhood and community retail centers — dominated by grocery stores — may be losing their luster. Nationwide their vacancy rate catapulted to a 12-year high during the first quarter.

In 2007, Marcus & Millichap handled about 2,200 retail property sales. This year, sales volume is expected to fall an estimated 25 percent, Haddigan says. Industrywide, he foresees sales volume tumbling as much as 50 percent in 2008 compared with last year.

Many equity investors are sitting on cash reserves earmarked for retail properties until consumer confidence rebounds. Retail real estate professionals predict a recovery in volume is not likely until after November's presidential election.

“I don't want to use the word ‘recession,’ but when people think that we're moving in that direction, they hold on to their money and simply don't do anything,” says Paul Chiles, president of Chiles & Co. Inc., a commercial real estate brokerage firm in Seattle. “That, in and of itself, is going to result in fewer transactions.”

Currently, some foreign investors are taking advantage of a weak U.S. dollar to snatch up retail properties around the country. In 2007, retail properties accounted for more than one third of major commercial real estate purchases by foreign investors, according to Marcus & Millichap. Foreign acquisitions of U.S. retail space jumped 75 percent in 2007 to $12 billion, according to Real Capital Analytics.

“From a national perspective, 2008 is going to be a difficult year. There is no doubt about it,” Bemis says. “But by no means will it be a disastrous year. While some retail expansion has slowed, it certainly hasn't ground to a halt.”

On your mark

To be sure, the work of retail sales and leasing brokers hasn't ceased. Fewer deals may be coming to the table, but brokers say they are continuing to perform valuation work and are keeping in constant contact with existing and prospective clients. As they grapple with the economic realities of 2008, some brokerage firms are laying the foundation now for the next growth cycle.

Positioning itself for growth, Staubach Retail opened an office earlier this year in Charlotte, N.C., and hired Randal Johnson to oversee it. Johnson headed his own retail market and site analysis company, Strategic Retail Partners Inc. in Charlotte. Smith says Staubach Retail's goal is to double its revenue within the next three years and open as many as 10 offices, with Washington, D.C., and Las Vegas among the desired markets. That would bring its total number of offices to 30.

Brokers say business remains pretty strong across much of the United States, particularly when you take into consideration that retail sales and leasing have been on a tear over the past few years. While some retail markets have been walloped by the subprime mortgage debacle this year, including parts of South Florida and Southern California, other markets are poised for stability, such as San Diego, San Francisco and Seattle.

“Looking ahead, 2008 will be a year to absorb space. As existing space leases up, the vacancy factor will decrease significantly, particularly with nowhere near as much space being delivered as during the past couple of years,” notes a research report on the San Diego retail market from Cushman & Wakefield.

In the second half of 2007, nationwide net retail absorption outdistanced the level experienced during the first half of that year. For the fourth quarter, the U.S. vacancy rate edged up to 6.6 percent, according to Bethesda, Md.-based CoStar Group Inc.

Whether it's San Diego or San Antonio, some creditworthy retail tenants — emboldened by favorable leasing terms like free rent and reduced competition for space — are seizing opportunities to enter new markets. For instance, Cushman & Wakefield's Mayer is helping London-based skin care products retailer Organic Pharmacy scout New York City and Los Angeles for its foray into the United States. On the flip side, landlords with desirable properties can hold out, even to the point of being “somewhat greedy and picky,” Mayer says.

For Inland Western Retail Real Estate Trust, with more than 45 million square feet of primarily retail space in 38 states, leasing activity has been steady, says Niall Byrne, president of property management. Leases are being renewed at a rate of 75 percent, he says.

“Candidly, I've seen much worse markets than where we are today,” says Michael O'Hanlon, president and CEO of Inland Western Retail Real Estate Trust.

Although today's market may be less volatile than in the past, retailers and investors are still not rushing into deals, brokers say.

In exercising caution, Cushman & Wakefield's Mayer says, more retailers are considering second-generation space for expansions or relocations, such as former Pier 1 and Hollywood Video stores, rather than pricier new space. Furthermore, tenants — to the chagrin of landlords — increasingly are requesting kick-out clauses so that if certain sales thresholds aren't met within a given period, a retailer can back out.

Retailers are “double- and triple-checking their estimates. They're consulting more people,” Chiles says. “They're trying to do everything they can think of to not make a mistake.”