Retail Sector Outlook a Mixed Bag, Say Industry Veterans

To some senior retail real estate executives, the constant stream of dire warnings about an economic slowdown amount to a self-fulfilling prophecy. “I believe that if we have a recession it’s because we ‘want’ to have one, and we’ll come out of it quickly,” said Greg Maloney, president of retail for Jones Lang LaSalle Inc. Nationwide, he noted, retail sales have slipped in only one month out of the last 12. Maloney also predicts that Washington will come up with a stimulus package that will spur consumer spending.Even if the main problems with the economy are uncertainty and lack of confidence, as Maloney argues, the impact on retailers and their plans appears to be real. In the short term, Maloney is watching the market for retail bankruptcies, which he noted tend to crop up more in January and February than in other months. Certain sectors of the retail economy, and some categories of shopping centers, will feel the pinch through much of 2008. The rule of thumb, Maloney says, is that consumers will tend to cut back in non-necessity categories like luxury items and home furnishings. “It’s going to affect those things where people have the choice, and where they feel the pinch, they’re going to come back,” he said. In particular, the trouble in the housing market that was accelerated by last year’s sub-prime debacle hastened the demise of the Levitz and Bombay home furnishings chains, which decided last fall to shutter their stores nationwide. Some regions have been especially hard hit. “In Southern California, we see a lot of home stores shutting down,” noted Paul Travis, a principal with Washington Square Partners Inc., a New York City-based retail developer. Lifestyle centers may also feel the pinch, as characteristic tenants like Ann Taylor and Chico’s grapple with lower earnings, Maloney said. Economic worries are also causing retailers to rethink plans to open new stores. “I think they’re going to do the right ones, and the questionable ones (they’ll put on hold),” Maloney explained. Projects that are already on track for a 2008 opening will continue to move forward. However, a center under development that was 60 percent leased by the end of last year may have a tough time reaching 90 percent occupancy in the current climate. And retailers will generally take a hard look at plans to open new stores in 2009. As concerns mount for some retail niches and regions, others may escape with little damage. One such category may be densely populated and under-retailed areas like New York City. “There is still such a disconnect between the amount of retail space and retail demand that we tend to be insulated a little bit at times like this,” Travis said of his hometown. As a case in point, Travis cited a five-year-old power center in the Bronx that Washington Square Partners re-tenanted in 2007 during the early warnings of economic trouble. The firm filled all vacancies at the center and upgraded the quality of its tenants, Travis said. New York City may be at the top of the retail heap, but Travis predicted that other big cities are likely to enjoy strong retail development and leasing this year, such as Washington, D.C., Boston, Chicago, San Francisco and Los Angeles.