For the last several years consumers defied economists' expectations and kept raising their level of spending despite rising energy prices. But predictions of consumption's demise and a recession are only growing.

While retail sales increased nearly 4% in each of the last three years, they've grown just 2.4% through October of this year, according to the International Council of Shopping Centers.

What's changed? The drivers that had fueled the shopping spree — employment growth, appreciating home values and an abundance of cheap debt — are waning. An average of 125,000 new jobs were created monthly through October this year, down 34% from last year. Debt is still relatively cheap, but tighter underwriting has choked its flow. Home prices in 20 major U.S. cities dropped 4.4% in August compared with the year before, according to the S&P/Case-Shiller Home Price Indices.

“We're certainly expecting a slowdown in the economy as consumers re-evaluate their spending,” says Abigail Marks, an economist with CBRE Torto Wheaton Research, a research affiliate of CB Richard Ellis. The housing slump has pummeled the confidence that rising home values fed just a few years ago, adds Marks.

Indeed, in Florida — arguably the housing slump's ground zero — monthly sales tax receipts have fallen for nearly a year. In August, the latest month for which information was available, the state took in $1.7 billion, a year-over-year decrease of about 5.4%, according to the state's department of revenue.

Renewed emphasis on operations

Still, landlords with well-located and well-managed properties will attract consumers and real estate buyers, despite a slowdown, suggests Bernard Haddigan, managing director for the national retail group at brokerage Marcus & Millichap.

“If you're an owner of quality retail, you've got nothing to worry about,” he says. “If you've got a secondary location or asset, you're in for worse times rather than good times.”

Shopping center landlords are becoming more proactive with struggling retailers, particularly with an expectation that bankruptcy filings will grow. Case in point: Video renter Movie Gallery filed Chapter 11 bankruptcy in September, and plans to shutter 520 of its roughly 4,400 outlets as movie rental via mail, Internet downloads and other competitors eat into the business.

To counter changes in the video rental industry, Jacksonville, Fla.-based Regency Centers, a real estate investment trust (REIT) that owns about 59 million sq. ft. of grocery-anchored and community shopping centers across the U.S., began phasing out such tenants in 2005.

That same year movie rental stores contributed 2.7% of the company's base rents compared with 2.1% today, according to comments made by Regency President Mary Fiala during the REIT's third-quarter earnings call with analysts.

Bracing for a downturn

Even owners of fortress malls lack immunity. Executives with General Growth Properties, a REIT in Chicago that owns or manages some 200 million sq. ft. of regional shopping malls in 44 states, are anticipating an increase in closings and bankruptcies in the first quarter of 2008.

Still, during their third quarter conference call, the REIT's executives noted that new mall concepts being introduced by American Eagle, Neiman Marcus, Under Armour and others continue to drive leases into 2008 and 2009.

“I do expect to see softening in certain retail sectors, but not to the extent that it changes retailer expansion plans by any large degree,” remarked General Growth CEO John Bucksbaum during the call.

Those plans could quickly crater if consumers stop spending. The dismal third-quarter performance at many retailers and subsequent cuts in yearly profit projections suggest consumers are already doing so. Home Depot's net income dropped 27% in the third quarter from the year prior, for example, while J.C. Penney reported a decline of about 9%.

Reis, a New York-based commercial real estate firm that tracks neighborhood and community centers, suggests that some rent deterioration is occurring. Effective rents among non-anchor tenants grew only 0.4% in the third quarter compared with 0.8% in the previous quarter. The vacancy rate climbed 10 basis points to 7.4%, the highest level in five years.

Meanwhile, a spike in construction could drive up vacancies. Developers are on pace to add 33 million sq. ft. of neighborhood and community projects this year compared with 27 million sq. ft. last year, says Reis, which concentrates on developments exceeding 5,000 sq. ft., excluding stand-alone stores and malls.

Additionally, developers plan to build about 65 million sq. ft. in 2008 and 2009 combined. Separately, mall landlords are adding tens of millions of new square feet via new construction and redevelopment.

But developers may be hard-pressed to find tenants to fill the new space unless store sales rebound. Marks is hardly optimistic. “It's going to be a difficult couple of quarters or so for retailers, and it will filter down to retail centers.”