Resizing Retail
Dec 1, 2007 12:00 PM, By Anne Field
Experts forecast the industry's prospects for 2008 and things look a little bumpy.
Whither the consumer?
The big question mark, of course, is where the consumer is going.
The pressures that have mounted on consumers for years have finally reached a tipping point and retail spending is dropping. Consumers have lost the $600-billion-a-year subsidy in the form of new home equity lines of credit. Instead, there are estimates that 2 million homes will be in foreclosure by the end of the year. And without the safety blanket of appreciating housing prices, Americans have become more debt-averse and have cut back on credit card spending as well.
Retail sales slowed in October, rising by 0.2 percent, according to the Commerce Department, compared to 0.7 percent in September. Already, vacancy rates of neighborhood and community shopping centers have increased by 10 basis points to 7.4 percent in the third quarter of 2007. That's the tenth consecutive quarter of flat or declining retail occupancy, according to REIS, the result of “retailer hesitancy to sign leases.” It should hit 7.7 percent in 2008. Projects in newly developed suburbs where home buyers haven't materialized have been particularly hard hit. “The markets that are going to remain strong are markets that haven't overbuilt,” says Fasulo.
What's more, growth in non-anchor tenant asking rents slowed for the fourth consecutive quarter, to 0.6 percent; the effective rent increased just 0.4 percent. Through the end of 2008 effective rent growth will trail asking rent growth. The former should rise 2.7 percent compared to 3.1 percent for the latter. In general, “Rents will see a modest growth, but generally will be flat in secondary locations,” says Haddigan.
Vacancy rates in power and regional center have held steady. But some analysts also foresee a slowing of leasing in regional malls over the next year. “Leasing activity happens early on in a construction cycle, so many leases were signed when the market was robust,” says Sam Chandan, chief economist at REIS. “The vacancies will come later.” When retailers seek to renew, they may ask for different terms or more concessions.
In general, there's also a possibility that centers with grocery stores, drugstores and the like may ultimately fare better than power centers. That, of course, is because consumers feeling the pinch are less likely to cut back on purchasing necessities than on the kind of goods sold at other malls. In addition, shopping centers may start switching to anchors such as grocery stores as opposed to big-box retailers.
At the same time, not everyone thinks that a slowdown in sales is bad news for developers. Leases — which, of course, provide the vast majority of income — span a three- to five-year term. As a result, he argues, REITs aren't likely to feel the pinch. “It's probably going to be a rough Christmas. But we don't think that will have a dramatic impact on tenants' decisions,” Wolfstein says.
Still, even if he's right, 2008 will be a year for living cautiously for just about everyone in the industry. “Developers will need to spend more time analyzing the marketplace, making sure they have the right tenants and the right investors,” says Jaggi. “They'll have to be more strategic in all their efforts.”
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