Q & A: Is There a Crisis in Retail?

With a number of retailers in bankruptcy and others closing stores – as reported yesterday by CPN — talk of a “crisis” in the industry is in the air. But is the state of retail a bone fide crisis along the lines of the early 1990s real estate depression, or just a more ordinary down cycle in a business universally acknowledged as cyclical? CPN spoke with two retail industry experts this morning to get their take on the direction the industry is taking, and the impact on retail real estate: Bernard J. Haddigan (pictured), managing director, national retail group of Marcus & Millichap Real Estate Investment Services Inc., and Michael Dee, senior vice president and national director of retail group of Grubb & Ellis Co. CPN: Are you expecting more retailer bankruptcies? Haddigan: Things will get softer before they get better. But not everyone will suffer equally. Necessity-based retailers will fare the best, while discretionary retailers – the Sharper Images of the world – will take the hardest hits. Even though food costs are going up, people still need to buy food, and will likely cut back on electronics, apparel, furniture and so forth, before food and pharmacy purchases. Dee: Yes, there will be more bankruptcies, as well as further consolidation among retailers. The housing slump and the credit crunch are affecting consumer spending, which is adversely affecting retailers – some clearly more than others. CPN: What about more store closures? Dee: We’re already seeing them, and will continue to see them for quite a while. A number of retailers that expanded aggressively over the last five years are now pulling back – Starbucks, for example. This year, for the first time ever, Starbucks is going to close around 100 stores. That isn’t bankruptcy, but the company is being affected by the economy and consumer tastes. Haddigan: There will be both store closings and a slowdown in openings. A number of the largest retailers have in fact closed some of their regional development offices. Developers with land under contract for retail properties are, in some cases, walking away from those deals, or proceeding very cautiously. If they don’t have to build, they aren’t. Dee: That’s true. Even retailers who are relatively healthy are taking a very hard look at new store expansion, which is having a negative impact on development deals. CPN: Are we merely headed into a down cycle, or something worse? Haddigan: I don’t think this is the end of the world. The business is cyclical. Frankly, cycles are necessary. Inefficiencies in the marketplace are corrected during this part of the cycle, and in fact we’re seeing a whole host of investors taking a strong interest in the retail real estate market right now, looking for value-add opportunities and even distressed situations, though there aren’t as many of those as you might think. Dee: Historically, what we’re seeing is fairly typical of this part of the cycle. It’s nothing new, except the names of the retailers being hit this time around. Worst case, the down cycle will go on into the first half of next year, depending on a variety of different factors such as the job market, the price of gas, the election, and so on. But it will turn eventually.