by David Stanowski
14 February 2008
Can you guess what was happening as the nation's home builders turned more and more farm land into track homes during the building boom of 2002-2005? You'd be correct if you said that commercial builders were following along behind them throwing up strip malls and shopping centers to bring "civilization" to these distant outposts of suburbia and exurbia.
Now that the housing boom has turned to bust, the commercial building is slowing down rapidly, and they are discovering that much of this new construction was built using their own version of sub-prime loans, that are likewise, starting to fail. With the consumer pulling back on retail spending, this is putting a further squeeze on retailers, and the commercial properties that they occupy.
The latest overall retail sales data are not that bad primarily because consumers have been forced to spend more and more money on food and energy, due to rising prices, but they are cutting back on so-called "discretionary spending".
Many food prices are tracking what wheat is doing in this chart:
The price of oil costs consumers directly when they buy gasoline and heating oil, and indirectly in the transportation costs of all goods, and when oil is used as an industrial feedstock in the chemical industry:
Overall U.S. retail sales rose 0.30% in January versus December, and rose 3.90% year-over-year.
Gasoline sales rose 1.99% in January versus December, and rose 23.0% YoY.
Grocery store sales rose 0.33% in January versus December, and rose 5.31% YoY.
Compare these to:
Clothing and clothing accessory store sales rose 1.42% in January versus December (they fell 2.30% in December versus November), but they fell 0.06% YoY.
Furniture, home furnishings, and appliance store sales fell 0.51% in January versus December (for the third decline in the last four months), and fell 4.34% YoY.
Sales at electronics and appliance stores fell 1.00% in January versus December (after a 3.23% plunge in December versus November), and fell 1.60% YoY.
Total discretionary retail sales fell 1.26% in January versus December, and fell 2.79% year-over-year; the worst nominal year-over-year decline since February 2003. Furthermore, adjusted for inflation, discretionary retail sales declined 6.48% year-over-year, the worst decline since at least January 1993.
When total retail sales are adjusted using the CPI, this is what it looks like; sales have turned negative! And that's using the CPI, that vastly understates inflation. Try doing it with gold!
It seems very clear that if a retailer is not selling gasoline or groceries, 2008 will likely prove to be a challenging year!
How are national retail chains responding to this market?
Retailers Taking Their Medicine and Turning Cautious Over Growth
Retail Industry Experts Say Closing Stores and Pulling Back is the Right Move in this Market
The past couple months in retail real estate have been laden with more store closing announcements and news of retailers slowing expansion plans than we've seen in a long time. However, two retail real estate strategy executives, a Wall Street retail analyst and a leading Texas retail real estate broker, confide that closing stores and turning cautious over expansion plans may be the best thing for retailers to be doing right now.
Announcements over the last couple months include:
Here are some comments about the attitude changes driving these closures:
Nina Kampler, Executive VP of Strategic Retail and Corporate Solutions for Hilco Real Estate: There's a wave of conservatism that's hitting the consumer. There are very few people who 'need' another t-shirt or pair of jeans right now. "Putting aside whatever operational issues they may be addressing -- We're in an economy where people might begin to think twice about spending $5 on a cup of coffee; so suddenly you don't need two coffee shops on a single city block."
Vaughn Miller, President of the retail division for Henry S. Miller Commercial: Retailers closing stores has nothing to do with Wall Street, but their losses. "Retailers are hemorrhaging and are trying to stop the bleeding. The bleeding is the operational cost or the occupancy cost of the stores.
Rob Plaza, Senior Equity Analyst for retail stocks at Zacks Investment Research: "Some companies are closing stores to increase profitability, some are doing it just to stay alive. A lot of retailers already had their plans for 2008 laid out, had already invested in signed leases, ground-breakings, pre-opening, etc, so they couldn't just stop those new stores on a dime. Looking back on that, they're going to wish they had just walked away and paid whatever it would have cost them to stop the process. ..... For the next decade, retailers are not going to have to open a brand new store because there's going to be so many empty ones that need to be filled."
Andy Graiser, Co-President of retail real estate advisory and disposition firm, DJM Realty: "There certainly is cannibalization with some retailers. I look at what's happened with bank branches and non-traditional retailers, like Sprint, that have opened up on every corner. Wall Street has put so much pressure to grow, grow, grow." ... "Now landlords certainly are feeling the pressure from some of their tenants that have been with them for a long time."
Nina Kampler on the Retail Store Domino Effect:
"When you have a situation of mass closings in the way that the beginning of 2008 seems to be indicating, it's not something the landlords can easily adapt to, it's not merely a matter of finding a replacement tenant in one spot in a mall. Perhaps stores need to be shuffled around so that more tenants don't fall in a domino effect. If closings are happening in significant numbers, landlords may question whether the existing shopping center economic model works."
The Bottom Line:
I think that the retail environment is going to be very tough for the next year or two, and that results will depend on each owner's ability to adapt and adjust to this situation as well as their success in forming new alliances with neighboring business owners. It is going to be even more important, than in the past, for the strip mall, shopping center, or downtown area where a merchant is located to create the necessary "energy" to pull the crowds that will give each individual owner the chance to prosper.
Retailers will also have to enlist the cooperation of their local government to reduce the "drag" that government places on the retail sector.
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