The following describes the downward spiral of the commercial real estate contraction:
1. Less consumer traffic forces marginal retailers to close once they have liquidated their merchandise at distressed prices.
2. Distressed prices redirect consumers away from the stronger retailers moving them toward marginal business levels.
3. Further price erosion occurs in an attempt to regain volume, especially among the large retailers.
4. Malls and strip centers increase their vacancy rate and reduce their rental income placing pressure on cash flow to support existing borrowings.
5. Landlords walk away from properties and loans (in most states)
6. Stronger properties reduce their lease rates to attract or keep occupants.
7. Banks now have more toxic assets.
8. Banks reduce their exposure to commercial real estate.
9. Existing properties begin to deteriorate.
10. Consumers stay away from deteriorated malls and strip centers.
11. Remainder of occupants move to better, cheaper locations.
12. Contraction of spending increases unemployment thus starting the process over again (#1)
See: http://articles.latimes.com/2010/sep/11/business/la-fi-melrose-avenue-20100911
How do you stop the spiral downward? It will be painful. Retailers will be closely watching the Christmas spending season this year. Could the 1/11/11 date see a massive correction?