In its August 1999 report on the state of the U.S. economy, the Federal Reserve Bank notes continued strength in economic activity nationwide. But it falls short of the optimism of past assessments by drawing attention to several weak spots, including worsening labor shortages, widespread supply constraints and land shortages.

These red flags have appeared nationwide, but to a lesser extent in the southeastern states of North Carolina, South Carolina, Georgia, Tennessee, Alabama, Mississippi and Florida. As has often been the case during the past two decades, population and employment growth in the region have abated the effects of economic weaknesses seen nationally.

For example, Upton's, a regional department store, recently announced plans to close 12 stores in Georgia and 37 stores in Florida. A&P supermarket also has moved out of Atlanta.

But Nordstrom and Saks Fifth Avenue have entered some Southeast markets and expanded in others. And strong regional grocery chains such as Food Lion, Harris-Teeter and Publix have been expanding throughout the area.

These moves support a general analysis of retail in the Southeast by Bernard J. Haddigan, senior vice president/divisional manager in the Atlanta office of Marcus & Millichap, a Palo Alto, Calif.-based real estate investment brokerage firm. He sees strength in traditional retail offerings such as regional malls and neighborhood centers.

"I think the strongest part of the market are neighborhood centers anchored by food and drug retailers," he says. "I think regional mall products are in good shape, too."

According to Haddigan, however, the power center segment may be weakening. "Power centers face an uncertain future here and nationally," he says. "These retailers often sell commodity products at risk from Internet competition. In addition, there has been such a proliferation of power centers that I believe the market is saturated. In the Atlanta metropolitan region, for example, there are 62 power centers selling products like linens, books, electronics and household goods."

Throughout the Southeast, traditionally strong markets are growing stronger, while some emerging cities are bursting with activity. Here's a look at retail activity.

North and South Carolina North Carolina continues to grow rapidly in two metropolitan centers boasting more than 1 million people, while South Carolina features two or three smaller but strong markets.

With 1.6 million people in the metropolitan area, Charlotte stands as North Carolina's largest population center. In the north-central portion of the state, the Triangle, composed of Raleigh, Durham and Chapel Hill, recently broke the 1 million barrier.

As a strong national financial center, Charlotte continues to attract large industrial and service-sector employers, according to Alan A. Marshall Jr., senior retail specialist with Grubb & Ellis/Bissel Patrick in Charlotte. "Retail development is following the construction of the outer beltway, Interstate 485, which is one-third complete," Marshall says. "As more interchanges are finished, more development appears, including neighborhood centers and power centers."

The improving transportation network has fueled development in Charlotte's secondary markets. "That's where the action is today," says Tom Derham, senior associate in the Charlotte office of CB Richard Ellis. "These (areas) include the cities of Gastonia, Kannapolis, Concord, Mooresville and Shelby.

"The most exciting development in North Carolina today is Concord Mills in Concord, 10 miles north of Charlotte. It's a monster," Derham says. The 1.8 million sq. ft. shopping center, which opened last month, boasts 18 anchor stores, including department stores and entertainment retailers, and approximately 200 specialty retailers.

The new center is driving nearby development as well, and existing centers are expanding to compete.

The pace of development in the well-educated, wealthy Triangle region is just as frenetic as in Charlotte. Once again, most of the activity has arisen in the surrounding bedroom communities, which include Cary, north and south Durham, and north Wake County.

In Durham, for example, Nordstrom is making plans to join The Streets at Southpoint, a 1.3 million sq. ft. planned development of Chicago-based Urban Shopping Centers Inc.

According to the Karnes Triangle Retail Report by Raleigh-based Karnes Research Co., more than 7.4 million sq. ft. of development has been announced or proposed in the Triangle. Northeast Wake County has a staggering 3.6 million sq. ft. proposed, including a regional mall. South Durham has 1.4 million sq. ft. proposed, which also includes a 1 million-plus sq. ft. mall and power center. Cary has over 1 million sq. ft. proposed without a mall.

But nothing is perfect. While developers eye North Carolina cities for the future, the communities themselves have begun to consider ways to slow development. In Charlotte, elected officials have been discussing moratoriums on construction, until the city's infrastructure catches up. Cary, which has grown by 70% over the past four years, is planning a vote on a new policy of issuing commercial building permits.

"Growth has caused a water shortage in Cary. To deal with that as well as congestion, residential development has essentially been stopped," Derham says. "Even developers with approved projects can't get permits."

In South Carolina, the state's primary retail market is the Greenville-Spartanburg-Anderson area. Last year, 42 companies expanded into the area, creating 4,300 new jobs and boosting the market's population further into the 900,000 range.

"We expect this area to reach 1 million in population early in the next century," says Doug Williams, senior retail representative for Grubb & Ellis/The Furman Co. in Greenville.

New and expanded retail developments designed to serve the growing population added over 1 million sq. ft. to this market during 1998. According to Williams, big-box retailers such as Wal-Mart, freestanding drugstores and grocery-anchored neighborhood centers spearheaded the growth.

Another area that has drawn some interest is the coastal city of Myrtle Beach. Chattanooga, Tenn.-based CBL & Associates Properties Inc. and Myrtle Beach-based Burroughs & Chapin Co. have announced plans to develop The Mall of South Carolina, a 1.2 million sq. ft. center with four anchors that is expected to open in fall 2002.

Located at the intersection of routes 17 and 501, the mall will position itself in the geographic middle of the area's 330,000 permanent population base and will draw from the region's estimated 13 million annual tourists.

To tap the tourist market, the mall's design will incorporate entertainment components in a traditional mall setting. The entertainment offerings have yet to be determined, says Michael Lebovitz, senior vice president of mall development with CBL.

In the center of South Carolina, Columbia's two-county metropolitan area has established a small but strong retail market of 500,000 people. The strength of the region can be traced to the economic stability created by government employment. Among the major employers are the University of South Carolina, as well as state government, county governments, municipal governments and the federal government.

According to a market study by Edens & Avant, Columbia, S.C., the region's unemployment rate fell to 1.3% in 1998, helping to boost Columbia's appeal to retailers.

In a report on the area, the Survey of Buying Power from Sales & Marketing Management magazine notes that effective household buying income has risen to more than $43,000 per year, a figure expected to grow to $51,000 by 2003.

The area's sturdy economic base produced retail sales of $4.6 billion during 1997 and led to the construction of approximately 620,000 sq. ft. of additional retail space during 1998, an expansion that increased total square footage in the Columbia metropolitan area to more than 13 million sq. ft.

Throughout both North and South Carolina, interest from national retailers continues. Several chains plan to enter or expand in North and South Carolina in coming years, says Jensie Teague, managing director of retail development in the Charlotte, N.C., office of Dallas-based Trammell Crow Co. "Big-box retailers, in particular, have firmed up their positions in the larger cities in each state and have begun to explore the secondary markets."

Home Depot has a half dozen stores in Charlotte and is expanding into the nearby cities of Statesville, Concord and Gastonia, all in North Carolina; as well as into Rock Hill, S.C. Other expanding retailers include Target, Lowe's and Wal-Mart.

Georgia Thirty years of growth in Georgia shows few signs of letting up as Northerners and Northern companies continue moving south. The state's population, expanding by 100,000 annually, could reach 7.8 million people this year. According to the U.S. Census Bureau, Georgia's population will increase by 32.7% by 2020, compared with a 23% rise in the U.S. population.

Since 1970, the population of the Atlanta metropolitan area has doubled to nearly 4 million people. The U.S. Bureau of Labor Statistics says the number of jobs available in metropolitan Atlanta has increased by 34.9% since 1990, the seventh fastest rate of job growth of any major city in the country. Annually, jobs are increasing by 3.3%, well above the 2.2% national rate.

As a rule, job growth drives population growth, which, in turn, drives retail development and retail sales. Atlanta's retail market lives by this principle. During 1998, about 2.5 million sq. ft. of retail space opened in the market. By the end of 1999, 6.7 million sq. ft. will open, notes Morris Ewing, managing director of Atlanta's Trammell Crow office.

Of this new construction, about 3 million sq. ft. comprise two regional malls: the 1.7 million sq. ft. Mall of Georgia in Gwinnett County, northeast of the city; and the 1.2 million sq. ft. Arbor Place mall in Douglasville, west of Atlanta. These additions will increase Atlanta's 1998 inventory of 15 million sq. ft. of mall space by 20%, Ewing says.

Another 3 million sq. ft. of retail space will open in the community or power center market, increasing the inventory of space there by 20%. In the neighborhood sector, developers will add 700,000 sq. ft. or 15% to the existing inventory.

"It's a lot of space to add," Ewing says. "In the neighborhood sector, 75% of the new space has been preleased, and I don't anticipate problems there." He points to A&P's withdrawal in the Atlanta area to prove his point. The supermarket chain vacated about a dozen properties, and within a few months, Publix had taken six of the spaces, Kroger had taken two and Harris-Teeter had taken two. While a few former A&P sites remain vacant, he says, the market swiftly absorbed the lion's share of them.

He's not as optimistic when it comes to other types of retail space. "(The addition of) 20% more mall and power center space is a huge increase," Ewing says. "The Mall of Georgia will draw from a local trading area as well as from northeastern Georgia, increasing the size of the market somewhat, but not enough to prevent competition with other malls on the north side of Atlanta.

"I think the sales dollars will divide, and tenant sales will be either flat or down," he continues. "If that happens, it will affect what retailers pay in rent and percentage rent. For the first time in a long while, we have a situation in Atlanta where rents may not escalate in malls."

On the other hand, the newly available space is drawing retailers to the region. "Galyan's has opened three new stores, two in power centers and (one) an anchor in the Mall of Georgia," says Ray Uttenhove, senior vice president of retail services in the Atlanta office of Los Angeles-based CB Richard Ellis. Staples made a dramatic market entry this year, opening seven new stores across the area in July. With Staples' entry, Office Depot and OfficeMax have not backed off from adding stores. Target also is repositioning some of its stores in the region and introducing its superstore concept.

Nordstrom, which entered the Atlanta market a couple of years ago, will expand its presence by going into the Mall of Georgia, he continues.

Georgia's next largest cities, Augusta and Macon, both offer developers and retailers markets that are 400,000 people strong. According to Uttenhove, major 1999 developments in these cities include a 400,000 sq. ft. power center in Augusta and three power centers in Macon, with Target leading the charge as the main anchor.

Along the coast, the greater Savannah metropolitan area also is pushing toward a population of 400,000 and adding new hotel and retail developments in its historic district.

Tennessee Two of the largest 20 cities in the United States anchor the retail industry in Tennessee. Nashville and Memphis boast populations close to 1.1 million people, and both illustrate the key retail benefit of a Tennessee location: economic diversity that hedges against recession.

According to MarketScope-Nashville 1998, a Trammell Crow publication, the city's economy has grown far beyond its historical roots in the music and tourism industry. Today, it hosts major companies in the fields of trade, manufacturing, health care, publishing and finance. Advanced technology will join the list in the near future when Dell Computer Corp. opens a new manufacturing site in the metropolitan area and takes on 3,000 new employees.

The MarketScope report predicts continued population and employment growth for Nashville, which should raise retail sales in the region above the current level of $13.4 billion per year.

Demand for retail space remains in line with supply, according to the report. In the first six months of 1999, just over 857,000 sq. ft. of space became available, and retail leases were signed for about 802,000 sq. ft. During the next 18 months, another 2 million sq. ft. of retail space will materialize, with the majority of that space being added with the opening of the 1.2 million sq. ft. Opry Mills development in spring 2000.

Public and private investments in the entertainment and hospitality arenas promise to support Nashville's strength as a retail host for years to come. This fall, the NFL's new Tennessee Titans opened their home season in the new Adelphia Coliseum, and the NHL's Nashville Predators will skate into their second season. By 2001, the $124 million Dover Downs racetrack will open in Wilson County.

In Memphis, the retail market has proven tight during 1999. Following significant new additions to retail square footage during the past several years, the retail vacancy rate rose to 12.66% at the end of 1998, up from 9.23% the year before. Trammell Crow's MarketScope-Memphis 1998 report attributes this rise to the loss of tenants in some of the city's older malls and to a negative absorption of 735,000 sq. ft. during 1998.

Nevertheless, Memphis has growth areas in the city and in the northern and eastern suburbs. In addition, 17 companies announced their intentions to relocate to Memphis in 1998, and another 46 companies announced expansions. Both of these developments promise new jobs and commercial construction in the region. With these strengths holding the line, the city's retail sector may regain its balance soon.

Alabama and Mississippi With fewer and smaller major cities, Alabama and Mississippi have always trailed the Southeast in retail development. Nevertheless, the population of the No. 1 retail market in the region, Birmingham, Ala., crested the magical population figure of 1 million during the 1990s, enabling the city to attract the attention of some of the nation's premier department store, specialty store, and big-box retailers.

Retailers new to the city this year include Restoration Hardware, which replaced a departing anchor in Summit Center. According to Jim Wilson, president of Montgomery, Ala.-based Jim Wilson & Associates Inc., Nordstrom also has begun to investigate Birmingham locations.

At 1.5 million sq. ft., Riverchase Galleria stands as the largest mall in the state. The upscale center, which is managed by Jim Wilson & Associates, completed a full interior renovation late last year.

However, the Birmingham market is saturated, according to Wilson. "The growth area in Alabama today is Huntsville," he says. "CBL recently opened a mall there, and the city's other mall is currently undergoing renovation."

Other areas of the state hold appeal, too. "The southern Alabama/Florida panhandle area is ripe for retail development," says Larry Pantlin, managing director of retail development in Trammell Crow's Atlanta office, which recently broke ground on a 145,000 sq. ft. power center in Dothan, Ala. "We intend to become more active in this market, starting with several projects we have planned for the northern panhandle area."

Mississippi's cities, although smaller than Alabama's, also have seen some new retail developments, thanks to the continued popularity of casino gambling in the state. "Mississippi has two important trading areas: Jackson, the capital and largest metropolitan area in the state with 800,000 people, and the Gulf Coast, including Gulfport and Biloxi," Wilson says. Recent projects include a new $850 million casino in Biloxi and a new big-box shopping center in Gulfport.

Mississippi's secondary markets have been strong in recent years as well. For example, the small city of Tunica in the northwestern corner of the state has become the third largest casino city in the United States. It leads the state's Gulf Coast region in casino revenues and ranks behind only Las Vegas and Atlantic City in that category. With casino revenues growing, it is reasonable to expect retail development in Tunica to grow, too.

Florida The overwhelming mood of Florida retail players is widespread optimism. Hundreds of new movie screens are being built, retailers continue to move into the state and new projects are being developed to accommodate the growth.

Statistically, the economic signs are good, too. The state's population is consistently growing by about 1.5% a year, according to Regional Financial Associates, an economic research firm based in West Chester, Pa. Household income is growing by almost 3% this year and is forecast to grow 2.7% next year.

Job growth is expected to slow a little in the next year, but still be strong enough to keep the state's economy humming. According to First Union Capital Markets, Charlotte, N.C., approximately 250,000 jobs are expected to be added this year and about 200,000 next year. The company also predicts that total construction spending in Florida for residences, retail, office buildings and public works projects will break $30 billion this year. Of that total, $2.8 billion will be retail-related, which is up 3% from 1998.

Much of the retail growth in Florida is being driven by grocery chains that are remodeling and opening new stores, and drugstore chains that are building more freestanding locations. In addition, some big-box users such as Borders Books, Babies 'R' Us and Target are expanding their presence statewide. New theater-anchored, entertainment retail centers also are popping up across the Sunshine State.

But analysts caution that today's ambitious building spree could become tomorrow's overbuilding problem. Concerns about overbuilding are especially strong in assessing the future of big-box retailers and theaters in the state.

"There is quite a bit of overbuilding in stadium-seat movie theaters, and that's going to make it tough for some," says Beth Azor, vice president of Miami-based Terranova Corp. "I can see how some shops, like bookstores and ice cream stores, would do well. But I don't see how someone would buy clothes when they are going to go to a movie."

Patrick Berman, a retail specialist in the Tampa, Fla., office of New York-based Cushman & Wakefield Inc., says that lenders are keeping controls over the building boom. "With smarter decision-making going in on the front end, retailers can put on the brakes quickly. It's easy to stop plans for those 10 new stores if you haven't broken ground yet."

Retail chains are no doubt attracted to Florida by the statistics showing population and household income growth. Add to that retail sales, which are expected to increase by 6.7% this year and 5.5% next year, according to Mark Vitner, an economist with First Union. He projects 7% growth in Miami-Fort Lauderdale and 6% growth in West Palm Beach. Both markets have been deemed the hottest spots in the year 2000.

"Florida is one of the best states in the country for retail," summarizes Vitner. "The state's economy will slow a bit, but it should still be good for retail."

* Metro Atlanta's economic growth will continue, with more than 60,000 new jobs in 1999.

* The Atlanta region's population continues to grow by 100,000 each year.

* More than 5 million sq. ft. of regional mall space is either under construction or will start within the next 12 months.

* New construction should push retail vacancies to more than 8% by year's end.

* Rental rates will increase slightly as the market absorbs new space.

* Average sales price per square foot will be in the mid- to high-$90s during 1999.