Here’s The Current Status of Retail Real Estate

Implications: This Christmas season is bringing a historically earlier opening of the holiday season promotional effort. The major retailers are doing everything they can to catch the shopper early through pricing wars and heavy marketing. Each wants to get a leg up on consumer shopping urges and capture the second round and last minute purchases through force of habit as well as product appeal. My wife has been doing early shopping at Kohl’s, J.C. Penney and Wal-Mart among others. Since I am a participant in her effort, I have noticed the marketing effort, the low pricing and the lack of customers in this early period. And now I notice that the retailers are crying wolf as the results have not been good. There doesn’t seem to be a lot of hope either that the post Thanksgiving period will lift the season to previous levels.

Analysis: The biggest domestic consumer industries, housing and the GM, Ford and Chrysler triumvirate, are of course taking a bath of historic proportions. Vehicle sales, however, are down only 2-3 % from the previous year which may indicate that the manufacturers are giving the product away as well as confirm that the triumvirate market share is slipping even more irretrievably. The lower values in housing and more conservative lending programs now in place are eliminating the cash out refinancing that bolstered sales volumes at the store in recent years. The impulse buyer crowd has fewer members today than yesterday.

We have constructed a ton of new retail space in the past five years. The developments are standardized as to tenancy and the retailers are digging into their own store markets to sustain growth. In the effort to get all there is in a market, the stores are robbing each other’s sales. In the Phoenix Metro area, I have noticed that Wal-Mart is lighting fires in the emerging Apache Junction area way east while the closer-in new Chandler store appears quieter and the last infill store planned to replace Mervyn’s in Tempe is either stalled or about to be cancelled. As an illustration of the latter phenomenon, Wal-Mart just cancelled a development in Garden Grove, Orange County, Southern California which was first planned to include the grocery function and later downsized to a regular store and now not to be. Home Depot has already extensively advertised its issues with trying to extract the last buck from its markets both retail and wholesale.

Poor Latino sales as the border issues restrict the employment of Mexican nationals sending purchases as well as money back to Mexico are hurting too. In the West with its large and soon to be majority Hispanic influence, this is indeed a big deal.

In addition, the high cost of oil and the weak dollar are weakening the punching power of the consumer as all this is occurring. The consumer is also besieged from many other fronts, say healthcare and education and the general reduction in wealth of the industrialized nations.

Finally, there are projections that the future retailer will be offering a wider mix of goods and services in the near future, the very near future of say 2015. The mention of entertainment and food is often mixed in with all kinds of fashion as an illustration.

The result will be a continuation of the trend toward shorter fashion cycles and real estate will become functionally obsolete at an ever greater rate. In the meantime, retailers will be forced to compete even more fiercely and there will be more losers than winners in the near future. While there may be a continuation of high construction volumes as the old footprints and buildings may not command a replacement retail tenant, a substantial portion of the inventory will go vacant or be converted to educational or healthcare or other quasi retail occupancy. The result will be lowe rents due to lower sales volumes, higher capital expenditures and operating costs accruing to the ownership of retail real estate and subsequent lower profit results to the landlord. Combine lower cash flow with higher costs for money and taxes alternative to ad valorem impostions and you have a recipe for a drop in value and way lower prices. Bet on 25% as a number for the average drop in value and worse in the most extreme cases.