The Expert: Bearish Consequences

Although the holiday shopping season started strong—2008 Black Friday sales increased 3 percent from 2007 figures, according to preliminary results released by ShopperTrak RCT Corp.—such sales activity is not expected to continue throughout December. The mania on the Friday following Thanksgiving is created by the promotion of extreme sales on a few select items that inspire the shopping pilgrimage, but this year’s jump-start to the holiday season will not be enough, and retailers face one of the worst seasons on record. A November same-store-sales drop of 2.7 percent, according to the International Council of Shopping Centers, is playing this out as we ring in holiday cheer.As we have seen occur during other recessionary periods, consumers are focusing on the basics, even during the holiday season, and sales for stores like Wal-Mart and Sam’s Club are increasing while sales reports in higher-priced stores like Saks, Ann Taylor and Nordstrom are down, except for Saks, which benefited from heavy discounting. I am old enough to remember when a good present under the tree was a much-needed new pair of shoes or underwear, and I was happy about that, but there is an entire new generation that has to learn this lesson, as well.What this means is that retailers that ring the cash register with high-end discretionary items and are undercapitalized will not generate enough sales during the holiday season to make up for earlier losses. Then there will be two choices: Cut expenses further, or shut down some stores. Various reports indicate that mid-level and even some low-end specialty retailers are planning to close some stores after the holidays, including Talbots, Zales, Macy’s, Ethan Allen, Dillard’s, The Home Depot, Lowe’s and Disney Store. Others are taking more severe steps: Linen ’n Things Inc. has announced that it will go out of business in 2009 and Circuit City Stores Inc. has filed for Chapter 11 bankruptcy protection.The property investment situation is playing out as Real Estate Research Corp.’s institutional investment survey respondents predicted in the fall 2008 RERC Real Estate Report: Confidence in the Face of Fear. Retail is without a doubt the risky investment property type during a recession, especially today, as the sector’s ascent was based on wealthy consumers flush with cash. Unfortunately, the situation is not likely to change anytime soon, as retail vacancies are projected to reach 10 percent by year-end, according to CBRE Torto Wheaton Research. Rents are starting to decline, and Real Estate Research Corp.’s required going-in cap rates or retail increased an average of 60 basis points during the third quarter.Although risk for this property sector certainly varies by location and store type, Real Estate Research’s return-versus-risk rating of 3.4—on a scale of 1 at the least and 10 at the most—indicated that the perceived risk for retail properties is much greater than the return required. The U.S. retail industry has once again become over-stored in a highly leveraged environment. The resulting de-leveraging environment is hitting retail real estate at all levels, and these are hard hits. This is looking a lot like the 1990s, when retail real estate investors had nothing but lumps of coal in their stockings and not much promise of many presents under the tree. Retailers and retail real estate investors are now looking to 2008 as year to survive, hoping that next year’s holiday season is better and that they are among the retailers still alive.