Although the changing economy has affected some decisions, the activity level of users looking to enter and expand into the Tucson retail market is continuing, pretty much unabated, according to CB Richard Ellis.

Now that the region has topped the one million population mark – by most demographers’ counts, though not technically by the Census Bureau – national retailers’ interest in the market is now at levels never before seen.

Why?

Quite simply, profits.

Many retailers say their Tucson stores are among the most profitable in their systems.

In 2007 the market saw or heard announcements of pending arrivals of new retailers including Tower Theater, In-N-Out Burger, Hibbett Sports, Dick’s Sporting Goods, The Avenue, Total Wine, BevMo, La Curacao, Louis Vitton, Tilly’s, Chick-fil-A and Brooks Brothers.

This year, expansions are being planned by Wal-Mart, Ross, The Home Depot, JC Penney, Target, Costco, Best Buy, Cost Plus and Kohl’s.

Themed restaurants, such as Cheesecake Factory, California Pizza Kitchen, Gordon Biersch and the Corner Bakery, are either actively on the hunt for locations in the metropolitan area or have already signed deals.

There is also increased activity in the regional mall hubs of Tucson Mall, Park Place and El Con.

Catching up on recent housing growth in the region’s northwest, southeast, south and southwest, commercial developers are progressing with retail projects on the periphery of the area. Millions of square feet is in development or under construction in new power centers and neighborhood centers.

Among the front-burner projects:

• Tangerine Crossings, a 1 million-plus square foot project at the northeast corner of Interstate 10 and Tangerine Road in Marana being planned by Westcor, developer of La Encantada in the Catalina Foothills.

• Tucson Spectrum, a 1 million square-foot power center at the southwest corner of I-19 and Inrvington Road is due to come online this year. It’s being being built by Barclay, which built the Rooney Ranch power center at North First Avenue and Oracle Road in Oro Valley and Old Spanish Trail Crossing at the northeast corner of East 22nd Street and Harrison Road on the eastside.

• Marana Spectrum, a 1.3 million square-foot power center at the southeast corner of I-10 and Linda Vista Boulevard in Marana, is another Barclay project in the planning stages.

These developments secured commitments of anchor retailers nearly two years ago and are heavily pre-leased.

Some developments that had been expected to open this year will be delayed by road construction, acquisition of entitlements, permit processing and infrastructure requirements.

Population growth has abated somewhat giving retailers expanding to the periphery of the region some reason to pause, but in some cases, delays will be much more than initially planned.

Mixed-use projects, incorporating retail, office and hotels, will increase in response to more than a decade of strong new home sales and increased tourism activity.

The majority of retail absorption in 2008 will continue to be in new retail developments, which will negatively impact existing centers as the new projects open already substantially occupied.

For the year, overall vacancy rates are expected to increase from the historic lows the market has experienced recently. Absorption will reach a new high, but it will be almost entirely in new space. This is not a new phenomenon.

Just as investors seek the safety of treasury bills in uncertain economic times, there is a "flight to quality" by retailers to the better shopping centers. Owners of existing centers, particularly strip centers in less desirable trade areas, will face intense competition for tenants. The challenge for landlords in those circumstances will be to seize every opportunity to retain existing tenants and attract new ones.

Average asking rents in new projects are not expected to increase much in 2008. The simultaneous arrival of delayed retail projects along the periphery and their delivery of new shop space will serve to soften rents and increase competition for available tenants. Perhaps a decline in construction costs will offset the soft rents and help bring these projects in on proforma.

As for retailers acquiring land for development, there are two trends that have emerged:

• There is a shortage of retail pads available for sale because most landowners now prefer to ground-lease their properties.

• A growing national trend to develop prime retail pads for multi-tenant users attracting tenants to the best of both better visibility at the front of a retail project and the high traffic a large anchor such as Wal-Mart or Target brings. The developer also benefits from higher rents for these desirable locations.

The price of fully-improved pads for retailers will continue to rise as the supply dwindles.

The retail investment market is still hot as retailers and developers who are well-known to institutional investors continue to attract a variety of capital.

Although capitalization rates and yields may have risen in some major U.S. markets, due to a shortage of investment grade retail product in the Tucson region, local asking prices are staying firm. Single-tenant, net-leased properties are still a popular investment and are trading at capitalization rates around 7 percent.

What happens to retail this year will depend mostly on forces from outside the market, such as a slowing economy that causes retailers to delay or stop expansion plans, or if capital markets fail to provide funding.

And, of course, retailers will be keeping their eyes on consumer spending to determine their next moves.