The Expert: Spring Cleaning Continues

A few positive economic signs—including February increases in housing starts and new home sales, along with orders for durable goods—offer hope that the deepening of the recession may be slowing. Even February retail sales declined just 0.1 percent from January sales, which was less than expected. And with less federal income tax being taken from paychecks beginning April 1, consumers will have a few more dollars to spend each month. Unfortunately, for every positive sign, there is a negative indicator that is just as weighty. Fourth quarter 2008 GDP was revised slightly downward from the previously reported decrease, the weakest performance since 1982, according to the Commerce Department, and expectations are that when reports come in we will learn that first quarter 2009 GDP was just as bad. Furthermore, corporate profits (after taxes) lost more than a quarter of their value in the fourth quarter, with year-over-year earnings down more than a third. This will result in more job cuts, and our national unemployment rate, already at 8.1 percent, according to the Labor Department, is expected to increase throughout 2009. Unfortunately, reports of additional layoffs throughout the year are likely to hold much more sway with U.S. consumers than a few extra dollars in their pockets, especially if those dollars, plus more, are pulled back out by state and local tax increases or higher gasoline or food prices.And as I have noted in previous columns, it is the discount retailers like Wal-Mart and Dollar General and restaurants like McDonald’s that are winning the competition for consumer dollars. Unfortunately, more and more specialty retailers are finding that regardless of changes in their product lines, new marketing approaches, two-for-one specials or other discounts, consumers are just not spending enough discretionary dollars in this recessionary environment. As spring cleaning continues, those apparel stores, home furnishings stores, restaurants or luxury retailers that are losing out will be tossed away with the other clutter that is no longer needed.Although much planned retail expansion has been put on hold, the United States is already severely over-stored, and retail availability, shuttered stores and distress will continue to increase. According to the International Council of Shopping Centers, there were more than 100,100 shopping centers comprising approximately 6.8 billion square feet of total retail gross leasable area in the United States at the end of 2008, or 22 square feet of retail space for every man, woman and child. Compare this to the early 1990s—the last serious commercial real estate crisis—when there were approximately 18 square feet of retail space per capita (and too much even then), and you get an idea of the how much excess retail capacity we have on hand. This state of oversupply in the retail sector has been reflected during the past few years by the investment conditions ratings assigned to this sector by RERC’s investment survey respondents and as shared in the RERC Real Estate Report. In our spring 2009 “Flash Report” of preliminary data, survey respondents rated the investment conditions for regional malls and power centers at 2.4 and 2.5, respectively. This was on a scale of one to 10, with 10 being high, and is the lowest rating that has been assigned since RERC began tracking investment conditions for retail property in 1991. The investment conditions rating for neighborhood and community retail centers remained about a point higher.RERC’s Flash Report of preliminary data also showed required going-in and terminal capitalization rates for the retail sector continuing to increase, along with the required pre-tax yield rates. These rates have returned to levels similar to the pre-boom era; therefore, retail prices (if marked to market) are off some 30 percent since the peak. No one ever said that spring cleaning is fun, or that what one finds is something worth keeping. However, in today’s world, a good old-fashioned spring cleaning is necessary to rid the retail market of some of its overhang. Unfortunately for some, the re-pricing of risk and values will continue well into the summer or longer.Ken Riggs is CEO of the Real Estate Research Corp.