Survival of the Fittest

Social Darwinism aside, reports of nose-diving profits for nearly every store in the nation continue to pour in. The Home Depot, Office Depot, Target, Lowe’s, Macy’s, Sears, RadioShack and Domino’s Pizza are just a few of the retailers posting losses for the quarter. How many quarters such reports will continue depends on how long these stores and others competing for the limited consumer dollars can hold on. They will do all they can to survive, from reducing new store openings or closing stores altogether to freezing salaries and cutting staff, to reducing contributions to employees’ retirement funds. Nothing is off the table, particularly to those retailers facing life or death. And given the depth of this recession, many retailers will not survive.Federal Reserve Chairman Ben Bernanke’s comments to Congress last week made it clear that the economy’s outlook remains uncertain and that downside risks appear to outweigh upside risks. He stated that only if strong government action succeeds in restoring some measure of financial stability is there a “reasonable prospect that the current recession could end in 2009 and a recovery could begin in 2010.”The severity of the recession is no surprise to those who have been watching the economic indicators most relevant to the retail industry—including the decline in consumer confidence to a historic low of 25 in February, according to The Conference Board Inc., and an unemployment rate of 7.6 percent, including some 570,000 retail workers shed since the recession began in December 2007, according to the Bureau of Labor Statistics. Realistically, retailers cannot expect much improvement in 2009 if unemployment increases to 8.5 to 8.75 percent by year-end as projected by the Department of Labor.This economic climate will continue to keep most discretionary shoppers at home throughout 2009, and consumers will retrench. After all, how many more jackets or pairs of shoes do we really need, and what new electronic gadget or furniture item is a must-have versus a nice-to-have?Lack of demand by consumers will directly result in lack of demand for retail real estate. In some areas of the country, particularly in areas where population increased rapidly and thus have already been overbuilt with retail properties or those that have soft housing markets—such as Phoenix, Las Vegas and parts of Florida—more stores will be closing. Regional malls and power centers in which department stores are the most prevalent will be hit the hardest, while neighborhood/community centers that hose grocery stores and other stores that provide the basic necessities should perform a little better.As demand declines, availability will continue to increase for this property type. According to CBRE Torto Wheaton Research, net absorption of retail space on a national basis was negative during the fourth quarter of 2008, the first time this has occurred since the company began tracking net absorption in 1982. Further, the availability rate for overall retail space reached 9.8 percent in the fourth quarter of 2008, up from 8.7 percent a year ago. Among the major metropolitan areas, the cities with the highest retail availability rates lie in the Midwest and the South. Detroit tops the list with an availability of 18.1 percent of retail space, followed by Columbus, Dallas, Indianapolis, Atlanta and Houston.Transaction volume for retail properties continues to fall, along with prices. According to Real Estate Research Corp.’s fourth-quarter 2008 transaction analysis in “RERC/CCIM Investment Trends Quarterly,” the average price of retail space declined 25 percent from the previous quarter. As one would expect, average prices for retail space in the East and West were higher than national averages, while prices in the South and Midwest were generally lower.As more space becomes available and prices deteriorate further, the best properties will survive while less desirable properties will sit empty. Even another holiday season will not bail out this asset class.