Looking Back, Looking Forward (12/30)
Dec 30, 2008 12:06 PM
The final numbers aren’t yet in, but there’s little doubt that 2008 was the worst holiday shopping season in a generation, marking an ignoble finish to a dismal year for retail. ICSC warned that same-store sales might be down as much as 2 percent for November and December combined when the final numbers are tallied, making it the worst season in at least 40 years. That may be enough to send some weakened retailers over the brink in 2009.
How did it come to this? A year ago we knew things were bad, but few expected 2008 to unravel to this degree. The first bad omen for the retail real estate sector actually occurred in late 2007—December 17 to be exact. That’s when Centro Properties Group first announced that it was teetering on the brink of insolvency. The trust limped through 2008 trying to find a savior. At one point it was able to arrange a mass sale of assets in a bid to raise cash to pay back some of its debt. But the relief was short-lived. The deal later fell apart. The company changed CEOs and was able to arrange several debt extensions. In the end--almost exactly a year to the day that it first disclosed its troubles--Centro agreed to cede control to its banks after failing to refinance $3.4 billion of debt.
Early in the year rapidly rising food and fuel prices hammered consumers hard. In spending more on necessities, consumers had to cut back on discretionary purchases. At the same time, job losses piled up and accelerated as the year went on. The unemployment rate rose from a low of 4.5 percent to 6.8 percent today—the highest level since the 1980s recession. A broader measure of unemployment—one that counts discouraged workers and part-time workers looking for full-time jobs—puts unemployment at 12.5 percent.
Another of the main issues holding back consumers remains plunging house values that are coming back down to historic levels after a massive run-up during the housing bubble. At the peak of the bubble, homeowners were pulling $800 million a year out of their homes through home equity lines of credit (HELOC). That is no longer possible with housing values plummeting and many homeowners falling “under water” on their mortgages.
A further worry today is deflation. It is leading many to hoard cash and put off spending while prices fall. And deflation is especially crippling for highly indebted parties. A long bout will exacerbate financial woes and potentially trigger more bankruptcies. Federal Reserve Chairman Benjamin Bernanke continues to loosen monetary policy in an attempt to spur inflation. The jury is out on whether these tactics will be successful. Bernanke has signaled he will entertain all measures in attempts to avoid a long bout of deflation.
Through 2008, the situation grew worse as the credit crunch deepened and an economic recession took hold. The result was a devastating one-two punch to the retail real estate sector. Many developers and owners had become reliant on short-term loans that in the past could be continually refinanced. The longer the credit crunch stretched on, the more owners became affected by the inability to pay down or refinance debt. At the same time, fundamentals began to weaken as retailers struggled with sagging sales. Vacancy rates began to rise, rents flat-lined or began falling and retailers stopped expanding. As the year progressed, more retailers began to fail as well, putting further downward pressure on property fundamentals. The weakening fundamentals, combined with the lack of debt, led to a massive drop in investment sales volume. Currently, cap rates are undergoing a correction as they return to historical norms and property values fall. Some estimates say that peak-to-trough values will fall up to 40 percent before all is said and done.
These headwinds put continual pressure on retail real estate. The most visible U.S. victim of the vicious cycle has been General Growth Properties, which continues to wrestle with its creditors over its $27 billion in outstanding debt. But widespread concern about other retail REITs also emerged, sending most stocks down to 52-week or all-time lows. At the same time, many companies pulled in the reins on development. Many projects planned for 2009 and 2010 have been delayed or scuttled altogether.
Things have become so dire that for the past month commercial real estate trade groups, including ICSC, have been lobbying hard for government assistance in the form of an “extension of the Term Asset-Backed Securities Loan Facility (TALF) to guarantee, finance or purchase highly rated, asset-backed securities collateralized by newly or recently originated commercial real estate mortgages.” Overall, 12 groups signed onto a letter sent to Treasury Secretary Paulson in late November and the groups have taken their case to the media with high-profile stories appearing recently in both the Wall Street Journal and New York Times making a case for the bailout.
With our without a bailout, the beginning of 2009 promises to be choppy. Many expect the dismal holiday shopping season to trigger another wave of store closings and retailer bankruptcies as the retail industry gets restructured. Experts expect secondary and tertiary players in each retail category to fall by the way side. Only the top two or three chains in some categories may survive. This eventually could pave the way for a new round of competitors to emerge. But the immediate effect will be a thinning of the playing field.
Will things get better? Many eyes are turned toward President-elect Barack Obama and his new economic team. Indications are that he will look to enact a massive stimulus package soon after taking office that could be worth up to $1 trillion in new spending and tax breaks in 2009 and 2010. That is a big figure, but over two years it comes to replacing what homeowners had been pulling out annually through HELOCs. Clearly, other economic growth will have to take place to spur consumer spending.
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