The Expert: Structural Shift on the Way

Projections that fourth-quarter-2008 holiday retail sales would usher in despair not seen since the Great Depression had everyone on pins and needles. Although November reports indicated that seasonally-adjusted retail sales, excluding automobiles, were down slightly more than 4 percent from year-ago sales, recent figures from the International Council of Shopping Centers show December comparable store sales to have declined by only 1 to 1.8 percent. From some of the pre-December sales-report jitters, I would not have been surprised to see retail spending fall 10 percent as 2008 came to a close!No doubt, it is a relief that the holidays are over and a bigger relief that the decline in retail spending was not nearly as severe, relatively speaking, as many had predicted. But the bleeding is not over. Although we are a nation of spenders and literally cannot stop spending on food and other necessities, a prolonged and severe housing crisis, rapidly rising unemployment rates, more stringent consumer lending standards and an increase in borrowing costs have adversely impacted retail sales and the long-term outlook for retail sales growth. As a result, look for more stores to close and for total returns for the retail property sector to deteriorate further. Many more stores will close their doors in 2009, surpassing the most recent peak closings in 2004.As I stated in my Dec. 9 column, the U.S. is overstored, and the closing of a significant number of stores in 2009, added to the closings that occurred in 2008, represents a structural shift for the retail sector, in the sense that a permanent shift is occurring versus a cyclical, or temporary, shift. Fortunately, retail expansion plans are being deferred and new retail construction starts are expected to decline dramatically, but virtually all retail sectors will be under pressure in 2009. While retail landlords are cutting rents, the biggest factor affecting returns will be the old real estate adage of “location, location, location.”Over the near term, the U.S. recession will take a disproportionate toll on retail properties located in markets that exhibit the greatest distress in home prices and the most significant increases in unemployment rates. Even so, Real Estate Research Corp., Principal Real Estate Investors and CBRE Torto Wheaton Research reported in Expectations & Market Realities in Real Estate: 2009—Market Aftershocks and the Road to Recovery that retail’s post-credit-crisis outlook remains reasonably favorable, assuming that some of the structural changes that are under way are made, strong population growth and low absolute interest rates continue and pent-up consumer spending activity resumes in 2010 as forecasted. 2009 will be a rebuilding year, yielding the survival of the fittest and the demise of those not fit enough to stay in business and, one hopes, bringing to a close one of the worst financial crises of our generation.