Jul. 27--Sunita Arora paused after inspecting renovations at an empty, street-level shop in Scranton's Mercantile Building.

"You have to offer class A space at class B prices," said Mrs. Arora, whose real estate company bought the three-story office and commercial structure at Penn Avenue and Spruce Street for more than $1 million in September 2007. "The rates are 20 to 25 percent below market rate to get them in. You do what you have you have to do."

The Mercantile Building symbolizes commercial real estate's plight. The financial crisis and rising unemployment have stunted demand for rental space, driving up vacancy rates and increasing stress on the financial system.

Helen Schwartz Gifts, an upscale retail icon for more than 60 years, vacated the Mercantile Building in December. The Country Club Men's Shop, a longstanding, high-end apparel store, closed in May. Both were victims of the feeble retail climate, leaving the ground floor of the building unoccupied.

"Right now, when you look at the first floor, it looks like a ghost place," said Mrs. Arora, broker/owner of ERA OneSource Realty and president of SA Realty Inc., Clarks Summit.

She plans to open a real estate office in the building in the fall and is trying to attract two more tenants.

"We're talking about two months free rent," Mrs. Arora said. "That wouldn't happen before the recession."

Commercial real estate's fortunes are linked closely to the economy and particularly unemployment, which hit 8.9 percent regionally in May, a 15-year high. The sector also includes office, industrial and residential properties, but the retail space has been hit the hardest.

"The key is the unemployment rate and the effect it's going to have on retail," said John Cognetti, president of Hinerfeld Commercial Real Estate in Scranton. "If people don't have jobs, they don't buy anything."

Retail sales in June were up 0.6 percent from May, but down 9 percent from June 2008. Average vacancy rates at regional malls nationwide hit 8.4 percent in the second quarter, the highest since at least 2000, according to Reis Inc., a New York real estate investment firm.

"Every retailer is taking a hard look at each store they have and each rent they are paying. You will see vacancies increase across the board," said Nathan Isbee, who tracks retail shopping centers for Stifel, Nocolaus & Co., a St. Louis-based brokerage.

"The climate right now is spooky," said James Walsh, general manager of the Mall at Steamtown, which has a 15 percent vacancy rate -- up 2 percent from last summer. "It's going to be a while before things return to what we perceive as normal."

The economic crisis forced the bankruptcies and liquidations of retail chains such as Circuit City, Linens 'n' Things, Steve & Barry's, Mervyn's and Sharper Image. Thousand of store closings contributed to the nearly doubling of commercial real estate loan delinquencies in the last year, to 6.4 percent, according to the Federal Reserve.

The trend attracts more attention from financial institutions.

"More banks are requesting more updates on more commercial loan portfolios," said James Nasser Sr., who operates a Scranton real estate and appraisal business.

"We've seen some things deteriorate and we're keeping a close eye on some projects," said Steven Ackmann, president and CEO of Fidelity Deposit & Discount Bank in Dunmore. "It's not like we're avoiding the problem here, but it's not as steep as in other parts of the country."

The pattern leaves more property owners in a conciliatory position during rent and sales discussions.

"Everything is negotiable today," Mr. Cognetti said.

Contact the writer: jhaggerty@timesshamrock.com

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