(For more retail coverage, click GlobeSt.com/RETAIL.)

SAN FRANCISCO-Numerous factors combined for the start of the year, such as a slower housing market, less planned development, and a hold on interest rates, to push retail buyers into a flight to quality-only purchases, according to Marcus & Millichap’s 2007 Annual Retail Report. With slowed GDP growth and employment, people will spend less this year, but class A retail space will still be hot for investors looking for a place to stash their cash.

According to the report, GDP growth is expected to slow to 2.6% this year, the Fed will likely maintain its “wait and see” approach to interest rates, and developers will bring about 120 million sf of new projects online, as opposed to the 130 million sf opened in 2006. Even the big-box chains such as Wal-Mart have announced reduced expansion plans for 2007. Retail demand is expected to cool, the report says, as homeowners stop pulling out home equity and are faced with adjustable rate mortgages shooting higher.

That’s not to say that tenants won’t do well, however. Less construction means the demand will have limited choices, and vacancy is forecast to increase only 10 basis points to 8.9%. Bernie Haddigan, managing director of the company’s National Retail Group, says it should be a good year for quality properties.

“We’ve seen this trend in the past six months, there’s more sensitivity to quality,” Haddigan tells GlobeSt.com. “In 1998-2001, there was a standard market. In 2002, value-driven started moving up, and the cost of capital fueled the frenzy. Starting late 2006, everything has been priced to perfection. There’s an enormous demand for high-quality.”

The report also focuses on specific US locales and ranks the New York City area as the nation’s strongest retail market. The remaining top five are rounded out, in descending order, by Fort Lauderdale, FL; Phoenix; Oakland, CA; and Seattle.

Lifestyle centers are one of the more successful and developed property types across the country, attracting the sought-after baby boomers in record numbers. On the other side have been grocery-anchored centers, which have struggled. “Now everyone goes to Costco or Wal-Mart, you can find food everywhere, even convenience stores,” Haddigan says. “People go to grocery stores now for just very specific items.”

Though most retailers are looking to expand, Haddigan says there’s going to be some slowdown by the end of the year. Like the housing market, Haddigan says it’s going to take a little corrective action on the side of most retail center sellers to understand the new pricing expectations. “Buyers are having an increasing resistance to nosebleed prices, unless you’re the best of the class,” he says.

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