Take steps to survive the less-than-rosy outlook for retail real estate

It’s not the cheeriest message to ring in the New Year but here goes: The real estate meltdown might actually get worse.

That’s the cautionary note from at least one expert on real estate economics and finance. But to offset the potential grim outlook for 2009 he also offered tips for retailers to survive.

“Recessions typically don’t last that long. 2009 won’t be a good year for anything,” said Thomas Davidoff, assistant professor at Haas School of Business at the University of California at Berkeley, who also happens to be an avid outdoor enthusiast and fitness buff.

SNEWS® knows the current economic state is important for your business. This is one look at different ways it’s affecting our industries and your business in a periodic and ongoing series of stories in SNEWS. This time around we take a look at the state or retail real estate and what that might mean for those who lease or own. Stay tuned for more in-depth reporting on the current situation as it develops and changes, from interviews with experts, closer looks at small businesses and how they are coping, to economic statistics, breaking news and how it affects consumers.

News to heed

The same economic crash that rumbled through the residential real estate market over a year ago now seems poised to hit commercial real estate.

“The next step is going to be the commercial real estate meltdown,” said Davidoff, who delivered the keynote address at the fall 2008 Strip Mall Conference and Expo at the Sacramento, Calif. Association of Realtors.

“Retail shopping stocks have been really hit hard. There are going to be bankruptcies and tenants breaking leases. Landlords are really over-leveraged. Property managers are already stressed.”

That might create a crisis at some shopping malls, while at the same time however opening opportunities for retailers looking for the best terms on new leases. There’s already a lot of empty space out there (for example, with the bankruptcies of Mervyn’s and Linen’s ‘n Things), and it looks as if there may be more to come. Best Buy for example reported dismal sales and a dismal outlook in late December.

Traditional shopping malls have already been facing mounting pressures, Davidoff said, noting two big factors:

• More people shopping online (Ninety-seven percent of consumers will shop online this year, a PriceGrabber.com survey said)

• Growing popularity of so-called suburban “power centers”

Power Centers and shopping strips have dominated the growth in retail building in recent years, according to the International Council of Shopping Centers. “Power centers accounted for almost 30 percent of new center square footage,” a 2006 shopping center council study stated.

Davidoff isn’t ready to signal the end of traditional shopping malls, but “there is pressure,” he said.

Co-tenancy will continue to be a big issue when more tenants fail, he said.

“If anybody goes black” in a shopping mall, he noted, “it affects everyone else.”

Weakened market conditions won’t necessarily be confined to regions, but some will be worse off than others. Areas hit hardest will be those already reeling from a high rate of residential real estate foreclosures. Still, specialty retail fared reasonably well at least through July, as SNEWS found in numbers reported this fall. Click here to see our Dec. 12, 2008 story, “NSGA survey: Specialty retailers improve profits from ’07 to summer ’08.”)

What has been and may be

The holiday season, of course, will have had a tremendous impact. The weakened economy has forced more Americans to reexamine their discretionary spending and retailers as of Christmas were reporting weak to moderate sales – but many because of already deep discounts. If the profits aren’t generated, the future for some retailers may remain bleak.

Although December’s final numbers weren’t available as of deadline, some early signals have given some hints about what we may find this month:

• ShopperTrak, which tracks traffic at more than 50,000 malls, said in mid-December U.S. foot traffic for the month of November fell 16.7 percent and the National Retail Federation reported sales dipped 0.7 percent for the same period. “November’s sharp traffic decline points to a rather uncertain consumer in today’s volatile retail marketplace,” Bill Martin, co-founder of ShopperTrak, said in a statement.

• Colliers International most recent bi-annual Retail Real Estate Report was equally stark. It said the U.S. retail market has undergone a “sea of change not experienced in this country since the early 1980s.” The real estate services firm said several things have been driving the slowdown: the U.S. economy’s third quarter contraction; falling consumer confidence; job losses; and falling consumer prices. “Because of these factors, retailers have become increasingly concerned with domestic consumer spending,” the Colliers report said.

Tips to weather the storm

Davidoff advised specialty retailers to cut prices as necessary to help weather the downturn. He believes that demand is much different than it was two years ago. Think about merchandising, he urged, and what’s likely to sell when consumers’ funds are tight. (SNEWS took a look in a story on Nov. 7, 2008 at tips from various experts in a story titled, “Managing your retail business for stability in a tumultuous economy.”)

“In general, people have been spending ridiculous amounts on stuff they didn’t need,” he said, suggesting that has quickly changed.

In fact, core goods may do better in a downturn than luxuries, he said, noting that Wal-Mart may do better than Nordstrom, although even Wal-Mart’s sales have been weaker than normal, and traditional supermarkets may do better than specialty ones such as Whole Foods.

Indeed, Nordstrom has been forced to cut prices and scale back store openings. The upscale fashion retailer saw its most recent quarter profit fall 57 percent to $71 million from $166 million for the same quarter last year. Sales fell 8 percent to $1.81 billion. The latest results at Costco Wholesale Corp., on the other hand, were merely flat. For three months ending Nov. 23, the warehouse-club operator reported sales rose less than 1 percent from a year earlier.

“Extreme stuff is out. People may be buying more surfboards, fewer parasails,” Davidoff said. And that advice can be taken to heart at specialty too if retailers focus less on the luxury items and more on the core products.

Long-term, however, is just the opposite, he said, suggesting that high-end items will be back in strong demand on the other side of the recession. Economists have predicted the end could come as early as mid-2009 but most are eyeing late 2009 as the most optimistic goal for the economy to return to better times.

Still, the short-term might offer some new opportunities for outdoor and fitness retailers. Leisure time will be up during a recession, he said, and consumers will have more time to devote to fitness activities. (Click here to see a Nov. 14, 2008 SNEWS story, “Gear and equipment for being active may still be bright(er) spot in today’s economy.”)

“Increasing unemployment can be good for fitness,” he said. “People have more time on their hands during a recession. If you’re making money hand over fist, it’s a heck of a time to go train for a marathon.” Davidoff knows something about being active: When he’s not teaching about economic science or warning about the dismal-looking year ahead, he’s also an avid runner, marathoner, hiker and general fitness enthusiast.

However, more time for exercise and recreational pursuits may not translate into purchases of higher-end goods. But that’s from the economist. In a special report after Black Friday, SNEWS polled key outdoor and fitness retailers around the country and found a less-than-glum outlook. (Click here to see a Dec. 5, 2008 SNEWS report, “Specialty retailers not so glum about Black Friday sales.”)

The more specialized the retailer, the worse off they’ll be,” Davidoff however predicted. “Costco sleeping bags will do better than REI, for instance. Ross Dress For Less and Wal-Mart will do OK. Target, not so good.”

— Stuart Glascock

SNEWS® is looking at different ways the economy is affecting our industries and your business in a periodic and ongoing series of stories. Stay tuned for more in-depth reporting on the current situation. Email us at snewsbox@snewsnet.com with any tips, comments or ideas on stories you’d like to see.