Bouyed by Retail News? Curb Enthusiasm, Grubb & Ellis’ Dee Advises

To the surprise of many analysts, retail sector seemed to catch a break from months of downbeat news this week. Leading the parade was the U.S. Commerce Department’s disclosure that consumer spending outside of the automotive industry ticked up a half-percent in April. Chain stores had a good month, too, as sales improved by 3.6 percent from March to April. And the country’s biggest retail REIT, Simon Property Group Inc., reported that funds from operations inched up about 7 percent compared to the same period last year. Both retailers and retail real estate professionals undoubtedly welcome any signs that the retail sector is holding steady. But some industry veterans caution that the consumer spending trends that ultimately drive retail leasing and development still point to a slowing market for the rest of the year and into 2009. “I think at this point, I think it’s way too soon to have even more cautious optimism,” said Michael Dee, senior vice president and national director of retail for Grubb & Ellis Co. As the starkest indicator of the retail sector’s woes, Dee cited the wave of store closings, like those that are expected to follow this month’s bankruptcy of the Linens ‘n Things chain. Other retailers are scaling back once-bold expansion plans, including FedEx Kinko, which will drop new store openings from 500 during the past two years to only 60 new locations this year. The slight improvement in consumer sales indicated by this month’s figures stem primarily from consumers’ movement toward national discounters like Wal-Mart, Target and Kohl’s, Dee argues. Inflationary pressures on food, gas and other basic products are still scaring most consumers to pull back spending. Dee expects slower leasing to continue for most categories of shopping center. In general, Dee views the leasing outlook for malls and department stores as slow, unanchored strip centers as struggling, and grocery-anchored neighborhood centers as steady. Some observers have noted that lifestyle center development is lagging, but leasing may be a different story. Many open-air centers may offer rents at a discount to regional malls in the same market, giving them a competitive advantage. Retail rents on a national basis should stay flat, and rates may slide in the markets hardest hit by the sub-prime mortgage crisis, such as Las Vegas, Florida, Southern California and Greater Phoenix.To contend with these new trends, some of Grubb & Ellis retail brokers who have specialized in tenant representation are expanding their work with landlords, Dee reported. Those brokers are recommending such steps to owners as increasing tenant improvement allowances, lowering triple-net pass-through costs, and upping free rent.