With financial news taking center stage these days, it’s easy to see why some people are hoarding their money under mattresses. With news of the Freddie Mac/Fannie Mae takeover, Lehman’s bankruptcy woes, and the proposed $700 billion rescue of the residential mortgage industry by the federal government, an honest projection of where the retail sector is headed is a question on the minds of both tenants and landlords. Marcus & Millichap’s National Retail Group recently presented a webinar shedding some light on the retail market, and detailing the present and future of the sector.
Hessam Nadji, managing director, research services for Marcus & Millichap, says the first ‘domino’ of what has started the cyclical downturn the economy is currently experiencing was the housing market.
“There are markets, such as Seattle and San Francisco, that had a healthy appreciation and continue to show price increase,” says Nadji. “Middle America, Florida, and parts of Texas, did not have much of an appreciation, and unfortunately, are seeing a major price correction. So the question becomes ‘how much of an impact is there from home price corrections of these local economies?’ That question is a profound driver of how deep these local markets will experience an economic downturn.”
Retail sales are always one of the key indicators as to where the economy is headed. With oil prices hitting an all-time high this summer, unemployment at its highest in years, and the continued downturn in housing, a look at retail sales reflects consumer confidence, and confidence in job and economic security. In 2007, retail sales were up about 3 percent, excluding automobile and gas sales, down from a peak of 6 or 7 percent growth during 2005 and 2006. Marcus & Millichap estimates these figures are headed even lower, a key indicator since retail makes up approximately 70 percent of our economic activity.
“Where we’ve seen the biggest pain is housing-related retail sales, which are down about 5 percent,” says Nadji. “Luxury and department store numbers are down 8 to 10 percent.”
With more of their disposable income in the gas tank these days, consumers are watching their pennies at the store. That’s good news for some retailers who concentrate on value: sales at wholesale clubs are up 8 to 10 percent and discount stores are up about 4 to 6 percent in the last few months, according to Nadji. Meanwhile, value oriented tenants like Ross Dress For Less and Dollar Tree continue to open stores. While restaurant sales are off, grocery stores, continue to post strong sales as consumers eat in more to save money.
In 2008, big name retailers including Linens ‘N Things, Boscov’s, Goody’s, and Mervyn’s have declared bankruptcy, creating a worry among landlords about vacant space. In addition to the bankrupt tenants, many of whom use their bankruptcy status to exit unprofitable leases, a number of retailers have announced store closings and holds on new openings. Many landlords have been faced with the prospect of taking back vacant space, a worry that could continue into 2009 and beyond.
“So far this year, there have been 2,800 store closures announced for an expected rate of 6,000 to 6,500 store closings this year,” says Nadji. “That is a high number but historically we’ve had other years of similar figures even during good economic times. There’s no doubt that for the next 12 to 18 months we’re going to see vacancies rise.”
Reports from Shopping Center Business’s roundtables from leasing executives exact a similar feeling. Tenants are taking more time to decide on leases for new stores. They also want to know the economics of any new deal thoroughly before a commitment is made. Landlords now report that they have a smaller pool of prospective tenants to choose from to fill vacant space. As well, landlords find that franchisees, many of whom helped fill space during the last round of retailer bankruptcies, are much harder to come by than just a few years ago.
Nadji concluded that he believes it will take until the middle of 2009 for housing to hit bottom on a national basis and for the extreme fear in the marketplace to dissipate.
“I think over the next 6 to 9 months we’re still going to see a cautious and strapped consumer in terms of spending,” he said.
— Cara Aliek