Sluggish third-quarter earnings for retailers do not bode well for developers trying to attract these tenants to their mixed-use properties. But developers remain optimistic, despite more bad news as the holiday season approaches. The Commerce Department's report last week that its broad measure of U.S. retail sales dropped by 2.8 percent in October—the largest monthly drop since records began in 1992.

"It's tough for mixed-use projects because housing is in a difficult place now and retail is in a difficult place," says Anita Kramer, senior director of retail and mixed-use at the Urban Land Institute. "But I think the wave of the future is still mixed-use. Everyone is having a tough time, but when things do come back, these kinds of places will continue to be very attractive."

Tough times, indeed. Target reported net earnings of $369 million, compared to $483 million in the third quarter of '07. For the 13-week period ended June 29, 2008, Starbucks reported a net loss of $6.7 million, compared to net income of $158.3 million for the same period a year ago. And Best Buy's total comparable store sales declined by approximately 7.6 percent for fiscal October. A number of national chains, including J.C. Penny Co., Home Depot, Chico's FAS, and Starbucks, are curbing their growth plans. And big box chains Linens 'n' Things and Circuit City have filed for bankruptcy. In fact, nearly 6,500 U.S. stores are expected to close this year—the highest number since 2001—according to the International Council of Shopping Centers.

One strategy for staying afloat in this tight market is to target local and regional tenants. Thornton Place, a mixed-use project under development in north Seattle, has received letters of intent from a handful of local retailers, mainly food and beverage companies. "The environment is not great," admits Bruce Lorig, founder of Seattle-based Lorig Associates, which is developing the project. "A thousand people aren't beating on the door, but we do have serious interest from five or six tenants."

JSH Properties reports similar tenant interest for Piper Village, an urban village redevelopment project also in north Seattle and set to open next year. The community is attracting independently owned stores, including pet shops and boutiques. "What I am seeing is, as older retail sites get recycled into multi-level mixed-use projects, the occupants of those older sites are relocating into new developments," says John Chelico, vice president of leasing and sales at JSH Properties. "As a result, at Piper Village, several of the tenants that we are working with are coming out of buildings that are slated for redevelopment."