Silicon Valley retail landlords who have suffered in the past year with rising vacancy and falling rents are bracing as bank branches close in the wake of industry consolidation and economic conditions continue to deteriorate.

But brokers and landlords are debating the degree of pain they face. Some predict tenant demand is sufficient to backfill most new vacancy; others caution such demand is shallower than it was and getting more so by the day.

Banks have been strong consumers of retail real estate in the valley and elsewhere in the past several years. In the past two weeks, valley landlords have learned that the industry turmoil is unlikely to settle soon. The largest U.S. thrift, Washington Mutual Inc., is to be acquired by New York's JPMorgan Chase & Co. WaMu has 661 branches in California and more than 50 in Santa Clara, San Mateo and Santa Cruz counties.

At the same time, Charlotte, N.C.-based Wachovia Corp., which has multiple Silicon Valley locations, is also up for grabs with Wells Fargo & Co. and CitiGroup Inc. fighting over it.

"I think we are in better shape locally than other parts of the country," said Jon Stansbury, a partner with Terranomics, the retail leasing division of regional brokerage NAI BT Commercial, citing the region's relatively stable employment base. "But that doesn't mean there won't be some blood-letting here, too. It depends on how highly leveraged owners are, when their loans roll over and what kind of staying power they have with rising vacancies, which are inevitable."

The next test for retailers will be the holiday season, after which Stansbury predicts further fallout as weaker retailers pull back or fail.

Sharon Carmichael, a vice president at Terranomics who represents landlords as well as tenants, said bank demand has helped prop up valley rents.

"Banks have been a driver of high rents because they have been willing to pay $4 and $5 a square foot (a month) in our market to get prime corner spaces and pads at intersections. They have been very desirable tenants," she said.

If banks reduce their branch count in Silicon Valley, which Carmichael believes they will, a key support for those higher rents will weaken.

Rental rates are key to the value of any commercial space. In general, falling rents translate to falling values.

At midyear, Terranomics reported that Silicon Valley retail vacancy had risen to nearly 3 percent from 2.3 percent at the end of 2007. South County centers were suffering the most, with vacancy of 7 percent. Nearly 1 million square feet of space was available for lease, most of it shop space.

Palo Alto landlord and developer John McNellis, whose company has a network of more than a dozen neighborhood shopping centers in the Bay Area, said the newer centers are most at risk because those landlords have the highest cost basis. Also at risk are centers near the weakest housing markets.

A year ago, McNellis said, he had no vacancy at his centers. Today he has a smattering, including two spaces vacated by mortgage brokers. He has one WaMu branch.

"There are classes of tenants that are no longer out there - little real estate companies, followers of new-home construction like appliance and mini-blind sellers," he said. "Across the board, all of the national retailers that we deal with have pulled in their expansion programs dramatically, and that was before the meltdown of the last couple of weeks."

Still, McNellis is not pessimistic. Banks have been drivers of higher rents, he agrees, but historically in the United States, as one class of hot retailers has faded, another has emerged.

"The older I get, the more convinced I am that things are never as good or as bad as they first appear," he said. "The sun is going to rise tomorrow, and confidence will come back."

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