While sales at home improvement chains such as Home Depot are taking a beating in the wake of the housing slump, the retail market as a whole continues to exceed expectations simply by staying in the black, according to Property & Portfolio Research.

“History suggests that consumer sales growth should already be negative, but the data is simply reflecting a slowdown,” says Suzanne Mulvee, senior real estate economist at Property & Portfolio Research.

A reversion to historic spending patterns could stifle demand for new retail space at a time when development is increasing. That's potentially a formula for overbuilding. Ongoing construction will increase the nation's inventory of rentable retail space by 2.5% this year.

For now, sales are increasing at a tepid pace. August's retail sales growth of 3.9% is well below the industry's 5.6% average since 1992, according to the research firm. “We'll stay below that average for the foreseeable future,” Mulvee says.

Still, every category of retail sales experienced growth with the exception of building and garden materials, which saw a 0.1% decline. Home Depot reported a 5.2% decline in same-store sales during the second quarter.

This year's consumer spending is stronger than might be expected had retail sales followed the historic pattern of trailing home sales by about six months. In this cycle, home sales peaked in December 2004 while retail sales accelerated for 15 months, peaking in March 2006.

Housing sales entered negative territory at the end of 2005 and are still contracting, with July sales down 9.3% from last year. Unemployment — at a six-year low of 4.6% — has probably helped to prop up consumer spending.

Also, homeowners tapped a record $382 million in home equity last year that may not yet be spent. “That is a windfall income that was probably big enough to translate into this year's spending as well,” Mulvee says.

Rising borrowing costs, however, threaten to bring consumer spending closer into line with the historical pattern of following home sales, which could mean a severe contraction ahead.

If a major sales slump spurs retailers to delay expansion plans and drives some stores out of business, will reduced demand for space and continued development lead to an oversupply? Retail vacancy rates had already crept up to 10.2% at midyear from 9.6% a year ago, according to Property & Portfolio Research.

Overbuilding may be unlikely since at least half of planned retail construction is contingent on big-box chains and would be halted if the retailers delay expansion plans, says Hessam Nadji, managing director of research services at Marcus & Millichap. Only about 18% of planned projects are purely speculative, he says.

Brad M. Hutensky, president and principal of The Hutensky Group, a shopping center turnaround firm, contends that new construction is more likely to be hampered by the credit crunch than by reduced sales. Many investors are waiting to see if recently reduced liquidity and higher debt costs will push up cap rates and lower property values, making it harder to finance new projects.

Even if overbuilding doesn't become a problem, retail properties will perform better if sales continue to resist their historic link to the deflating housing market. The Federal Reserve's half-point cut in the Fed funds rate on Sept. 18 could do the trick by easing consumer debt burdens and enticing homebuyers.

Otherwise, history suggests retail sales will deteriorate for one or two quarters beyond the decline in home sales, which are unlikely to bottom out till next year.

“Your decision to spend or not to spend can be made for you if you're not able to pay your mortgage,” Mulvee says. “Spending levels will probably be determined by which way the economy goes in the next few months.”