The Expert: The Uneven Road to Recovery
- May 26, 2009
No one ever promised that the road to economic recovery would be a smooth one, but even those of us who were prepared to navigate hills, curves and steep valleys are finding the beginning stages of economic stabilization more tiresome than we had imagined. We continue to battle a greater amount of negative indicators than positive ones, and the positive indicators appear to be relatively weak, but at least the pace at which we have been sliding down this slope is starting to slow. It is hard not to become battle fatigued with all the ups and downs on this terrible and unexpected rough stretch of road, but we are starting to see the few “green shoots” of economic growth to which Federal Reserve Chairman Ben Bernanke referred several weeks ago, patching in holes here and there.Consumer research reflects a mix of positive and negative indicators. The Conference Board reports that consumer confidence is starting to inch upward, but the Index of Consumer Sentiment survey reading for March 2009 stayed about where it has been for the past six months, with consumers continuing to save versus spend. The most worrisome thing about this information is what it says that we can expect for the rest of the year. According to the Reuters/University of Michigan survey, “Total real personal consumption is expected to decline by negative 1.9 percent in 2009, more than twice as steep as the worst annual decline since World War II.”The housing market is also starting to stabilize and is closer to finding a bottom. Unfortunately, existing-home sales declined in March, according to the National Association of Realtors, leaving the market with a total inventory of 3.7 million existing homes for sale, a 9.8-month supply. The supply of homes has been inching downward, but the market needs to clear up much more of this overhang before the economy can be considered healthy. (Traditionally, the supply of unsold homes should be at about six months to indicate market recovery) If new home construction doesn’t increase too much and foreclosures don’t unload too many more homes onto the market, low interest rates, coupled with lower home prices, will eventually help move us toward equilibrium on this uneven road to recovery.Unemployment continues to increase and will remain high through 2010, the U.S. auto industry is collapsing and the price of crude oil and gasoline is starting to inch upward. Thus it is no wonder that consumers are continuing to hang on to their dollars as they anticipate more bumps. As a result, retail sales fell 0.4 percent in April after also falling in March. Much like we have seen throughout the recession, Wal-Mart, McDonald’s, and Walgreens saw strong sales in April, while sales at high-end retailers like Saks Fifth Avenue, Neiman Marcus and Nordstrom further deteriorated. Notably, retail sales for some retailers like JCPenny or Stage, though not considered good, were described as “less bad” than in previous months and are another sign of movement toward stabilization.With retailers sharing consumers’ pain and discretionary spending still elusive, the retail property sector continues to struggle and will continue to do so for some time. Tied to consumers and reflecting their spending habits more than any other property type, the sector received the lowest return-versus-risk rating from institutional investors among the core property types, as recorded on Real Estate Research Corp.’s investment survey and reported in the spring 2009 issue of RERC Real Estate Report, “Determined to Overcome New Depths.” With a first-quarter-2009 rating of 3.1 on a scale of 1 at the lowest and 10 at the excellent, the low rating—lower than the 3.4 reported during the fourth quarter of 2008—indicates that the investment risk far outweighs the potential return for this sector. Some respondents stated that it might be wise to sit on the sidelines for the next few quarters rather than investing in retail properties, as prices will certainly go lower. Others thought quality properties were available in good locations and at fair prices and that it may be time to look for opportunities.These differing views are generally in line with Real Estate Research Corp.’s value-versus-price rating for the various property sectors, also reported in the company’s report. Although the value-versus-price-rating was 4.1 and was relatively low overall, the retail sector improved from the previous quarter and it did not have the lowest rating among the core property types; this honor was claimed by the office sector. This is the case, despite the already high availability rate and with additional retail availability sure to come.As the U.S. economy continues to suffer the ill effects of the post-credit market extremes, there is evidence that although we are starting to see a few signs of stabilization, the bumpiness will continue for some time. We have much to work through and there will be many more major ups and downs before we can expect to see this uneven road level off to a point where consumers stop worrying about job loss, lost retirement savings or other wealth lost in the worst shock to our economy since the Great Depression. This quarter is all about adjusting to a new awareness that retail was in the center of this economic storm and that there has been permanent destruction to certain roadways that will never open again. But those who have an eye on the long-term horizon and are committed and prepared to do whatever it takes to stay the course of raw survival, will, in keeping with Darwinian principles, survive and one day ride to a higher plane.Ken Riggs is CEO of Real Estate Research Corp.