The Southwest market is sizzling with retail space and population growth. Phoenix and Las Vegas in particular are attracting rooftops and retail developments at a record pace. National retailers want more stores in these markets, and developers are eager to accommodate. More than 10 million square feet of new space was en route to major Southwestern markets in 2003. Additional major developments, including new regional malls and power centers are in the works through 2005. And such blistering growth has its consequences. The cost of development is rising, setting the stage for increased vacancies and squeezed profit margins. In the rush to fill new space, risky tenants are signing leases, healthy tenants are relocating, and owners of older properties are struggling to pay their loans.

Wachovia Securities research indicates CMBS loan delinquencies are dangerously high in San Antonio, Tex. About 3.33 percent of the market's total CMBS loans were delinquent as of the first quarter. Rapid supply growth is also a concern in San Antonio, where the grocery-anchored vacancy rate to 15 percent thanks to the exodus of Albertson's and the musical sites game being played by Wal-Mart as it ditches older digs in favor of new supercenters. The city's regional mall vacancy is also disturbingly high at 10 percent. The opening of Rouse's 1.3 million-square-foot The Shops at La Cantera in 2005 will only cause more darkness to fall on older, obsolete mall space.

Cap rates and competition continue to be a challenge in the Southwest acquisitions arena. Texas-based Weingarten Realty Trust — a major player in the grocery and big-box-anchored sector — is searching for acquisitions, but finding few opportunities. High demand for strip center product coupled with high pricing caused, in part, by the low interest rates, makes it challenging to find assets cheap enough to allow for creation of additional value through releasing, renovation or redevelopment.

Fort Worth, Tex., is the only market in the region posting growth in returns for retail property owners, according to Wachovia. In 2003, effective revenue from retail centers rose 3.1 percent, with forecasts calling for an additional 2.3 percent rise next year. Effective revenue per square foot in Fort Worth is $11.04. By comparison, Dallas revenues per square foot only grew 2.2 percent this year; San Antonio revenues per square foot grew 0.9 percent; Phoenix revenues were down 0.2 percent; Austin, Texas, revenues were down 0.2 percent; and Las Vegas revenues were down 4.2 percent.