America's retail sector is returning to what works.

The U.S. retail sector has been rocked over the past 12 months as the economic recession's reach widens and plummeting consumer spending batters retail sales in almost all major markets.

Stressed performance margins have called into question retailers' ability to meet obligations with many strong name brands including Circuit City and Michaels', among others, now out of business.

As mounting vacancy weakens market fundamentals, lenders and investors have shied away from retail assets against the looming uncertainty of retail's viability in a deleveraging, less consumptive world.

Consumption has been on an upward track for more than 57 years in the U.S., with only minor dips in the mid 1970s, early 1980s and 1991-1992. The second half of 2008, however, marked a turning point when the third and fourth quarters registered substantial declines in annualized consumer spending by 3.8% and 4.3%, respectively.

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Consumers' strong pull back has led economists to project 2009 will show a third (and possibly a fourth) decrease in the first and second quarters, as discretionary spending continues to fall.

Despite the current dismal state of the market, the strong long-term outlook for the retail sector suggests the real question is not whether retail will survive. While a great deal of wealth has been lost in the current economic downturn, U.S. demographic trends are positive with a growing, and increasingly educated, population well positioned to face global shifts ahead.

Like earlier economic downturns, this recession will end and the U.S. economy will once again thrive as innovation takes hold and expansion resumes.

Rather, the more significant questions facing the retail market are: When will we see growth return? What sectors will be hurt the least? Who will emerge from this recession first? What will be the impact to retail real estate values? The answers to these questions can be found in the fundamentals that drive retailing and retail real estate.

Dynamic change is undeniably central to retail, and survival of the better concept, stronger operator, enhanced customer experience, and relevant product provider is the result.

Many brands dominant yesterday have slipped into second tier or are no longer in business today. Not long ago, the number one retailer worldwide was Sears, then KMART, and now WalMart. When the book Good to Great was published, Circuit City was named as one of the best U.S. companies, while very few people had heard of Best Buy.

Retailers that struggled under better economic conditions have been crushed by the current downturn, while retailers that were doing well are keeping their heads above water.

For the surviving, stronger retailers the immediate advantage is less competition for the prime retail trade areas vacated by weaker brands.

Retail spaces in demand at the market's peak--well located, highly visible trade areas with strong demographics, stable co-tenancy, and superior accessibility--remain highly sought by conservative investors and a more cautious user base with stronger risk aversion.

With consumer spending focused on staples over luxuries, discounters and grocers have fared the best under current market conditions and are likely to be the first to shift into expansion mode at the early signs of the recovery.

New concepts will also be quick to take advantage of opportunities to capture prime retail at deeply discounted prices, aggressively launching new stores to increase market share before competition heats up.

New retail development will be slow to come back online until existing vacancies have been back filled and financing returns to the market.

Opening new stores is imperative for retailers seeking to grow equity and increase earnings per share. Before this can happen, however, the thorough housecleaning that began two years ago will continue through much of 2009, as portfolios are strengthened with the disposition and repositioning of weaker assets.

A return to basics is occurring across the board in re tail real estate, accompanied by necessary market corrections.

Landlords are adjusting their expectations and the bid-ask for lease space is returning to workable variances. For too long, many retailers had pushed the envelope by paying rent and CAM charges well above the typical 8 to 10% of gross sales, with the expectation that consumer spending would boost sales enough to bring ratios back in line.

For their part, developers had come to believe that retailers would pay any rental rate needed for a reasonable return on their costs and risks, and built centers that required retailers increase their store average volume by 50% in order to meet their rental obligations. Although appealing in theory, the practice failed miserably.

With the focus shifting from more for more's sake to smart growth, an appreciation for the basic fundamentals of operating a profitable retail business has returned.

Everyone involved in making the retail world go round has a fresh perspective and committed interest ensuring the fundamentals work. Let's hope this time around we remember basics are the key to our success.

Co-authored by Ross Moore, executive vice president and director of Research for Colliers International.

PAT DUFFY, CHAIRMAN, COLLIERS INTERNATIONAL'S RETAIL SERVICES GROUP