Retail Real Estate Should Begin Its Healing Process in 2010
Dec 4, 2009 1:05 PM, By Elaine Misonzhnik
After suffering through a moribund 2009 when investment sales, lending and leasing were largely frozen, the retail real estate industry is showing signs that the long-awaited rebound may be starting.
In September, U.S. same-store sales eked out a 0.1 percent gain—the first increase in more than a year. Growth in October, at 2.2 percent, proved even more robust, although November was weaker with a 0.3 percent decline. Meanwhile, the volume of retail investment sales transactions increased 36 percent in the third quarter compared to the second quarter, to $2.1 billion. And the volume of retail properties in distress in October remained flat with the month prior, at $34.5 billion, according to Real Capital Analytics, a New York City–based research firm.
It’s not that things are good or that a robust recovery is underway, but the situation appears to be less bad than it was for most of 2009. There are the faintest glimmers of hope. And while 2010 promises to be another tough year, many industry pros think it will mark the beginning of a slow turnaround.
The industry will get the first indicator of things to come if there is continued positive same-store sales growth during the 2009 holiday shopping season. A solid holiday sales season could put the brakes on store closures and retailer bankruptcies. That, in turn, could help stop the descent in occupancies and rents and allow property values to stop falling. It remains likely that the pace of openings will be slow and even if vacancy rates at malls and shopping centers stabilize, they will likely remain at or near record highs for several quarters. Once the bottom has become clear, however, it may trigger the long awaited run of investment in distressed properties, which many believe will provide the foundation for the industry’s recovery.
Unfortunately, a rebound in retail real estate is not entirely under the industry’s control. What happens in the broader economy will dictate the strength and speed of the recovery. On the plus side, the economy does appear to be growing again. In the third quarter, U.S. GDP grew by an annualized rate of 2.8 percent, according to preliminary estimates from the Bureau of Economic Analysis, ending a string of four straight quarterly declines. And, according to the International Monetary Fund’s World Economic Outlook, published in October, real GDP will grow by 1.3 percent in 2010.
“The economy is in recovery and it looks like we are officially out of recession, but it doesn’t really [feel] like it,” says David J. Lynn, managing director with ING Clarion Partners, a real estate investment management firm. “There is not a lot of good organic growth and unemployment is still going up.”
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What worries Lynn about the broader economy—and should be doubly troubling for retail real estate—is the unemployment rate, which many economists predict will continue to rise well into 2010. The unemployment rate recently topped 10 percent for the first time since the early 1980s and the bleakest projections are that it could keep going past 11 percent or 12 percent. And that’s just the official figure. By an alternate measure of unemployment, counting jobless, discouraged workers and part-time workers that want to work full-time, the unemployment rate is above 17 percent.
The past two economic recoveries have been marked by prolonged periods where the economy continued to hemorrhage jobs long after the recovery set in. Many economists think this could be worse. If the last cycle was the “jobless recovery,” this one may turn out to be the “job-loss recovery.” Add to that rising energy prices and the constricted supply of consumer credit, and the retail sector still faces daunting obstacles. The problem, then, is that growth in the economy would not be marked by a strong resurgence in consumer spending, dimming the prospects for retail real estate to rebound quickly.
“We might be over-retailed as a country and that’s okay when you have a zero percent savings rate and when even your pets get credit card offers. But that’s changed,” says Lynn. “There is less wealth to spend, there is less credit and more concern about the future.”
Retailer outlook
In October, the Consumer Spending Index tracked by global consulting firm Deloitte rose for the fifth consecutive month. On the same-store sales front, ICSC projects the November/December period should post a small gain of about 1 percent. If that comes to pass, the stronger retailers might stop coughing up cash, leading to less pressure to close underperforming stores and fewer rent concession requests, says Sam Latone, co-CEO of the Shopping Center Group, an Atlanta–based retail real estate brokerage firm.
At the same time, if the holiday shopping season doesn’t go well, there might be between 6,000 and 8,000 store closings in the first half of next year, according to Al Williams, principal with Excess Space Retail Services Inc., a Huntington Beach, Calif.–based real estate disposition and lease restructuring firm. However, the predictions were also dire coming into 2009, but that did not come to pass. Many space disposition specialists have been surprised that in 2009 store closings have stayed comparatively low.
Drastic cost-cutting measures and conservative merchandise orders helped many struggling retailers stay afloat. But Andy Graiser, co-president of DJM Realty LLC, a Melville, N.Y.–based real estate consulting firm, thinks retailers ultimately will need to do more. Cost cutting can be a temporary salve. In 2010, retailers will need to show an improvement in sales at to survive long-term. That’s why many predict that the closings that didn’t happen in 2009 could happen in 2010.
Indeed, the Emerging Trends in Real Estate 2010 report produced by the Urban Land Institute and PricewaterhouseCoopers predicts weaker retail players will continue to be weeded out. At the beginning of the recession, every retail category in the U.S. featured five to six national chains, making the field too crowded, according to Latone. With consumers’ new focus on “needs, not wants,” only the top two or three performers in each sector are likely to come out of this downturn, he says. What’s more, we might see additional bankruptcies in the big-box sector, after the market has already absorbed the shock of the liquidations of Circuit City and Linens ’n Things.
Next page: On the upswing?
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