Fleming Companies Inc. is selling off dozens of ABCO Foods locations throughout the Valley, and Kroger is expected to close a number of Fry's Food stores in the coming year. Kroger completed its purchase of Smith's, Smitty's and Fry's last year and plans to close duplication locations and smaller stores, which will result in large vacancies in about a dozen grocery-store-anchored retail centers in 2001.

"You are going to see a lot of unique ways to utilize older retail and some it won't be retail when it gets done," Butterworth says.

Even with the glut of space expected to hit the market next year, Butterworth believes that the vacancy rate might only drift up slightly. Most of the new space being built now, some six million sf, is significantly pre-leased and will have little available space to offer.

Lease rates, which have risen sharply in the past three years, could level off in 2001, she says. Rental rates in a small shop in the center with a good anchor are asking between $18 and $36 per sf, while mall space is going for between $30 and $50 per sf.

"We've reached a threshold that needs to stabilize," she says.

Regardless of what happens in 2001, the past year was stellar for retail in the Valley.

At the start of the fourth quarter, retail vacancy in the Valley hit 4.54%, more than a full percentage point lower than the start of the year when the vacancy rate was 5.52%, according to a survey by CB Richard Ellis. This is the lowest rate in more than a decade and a level that, by all accounts, maintained itself through the fourth quarter.

Even though more retail space was built and brought to market in 2000 than in any year of the past decade--more than three million sf of space--demand has outpaced that development. The amount of new retail space created marked a modern high point for development.

The steady influx of 100,000 new residents annually into the Valley and residential housing in new areas has pumped up retail development. With the East Valley nearing build-out in several suburbs, new housing development moved to the West Valley, North Scottsdale and further south into Chandler, spurring new retail development in these areas.

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Glut of Grocery Space Could Ding Retail Market

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