Has the consumer left the party? That is the question that hangs over the U.S. economy and the retail real estate business today. The housing boom is officially over in most places. Both housing starts and existing home sales have stalled. That's cut the flow of cash into the malls and power centers, where homeowners took their equity out to play. And the high cost of gasoline is having serious effects on shopping behavior, hurting everyone from Wal-Mart Stores, which posted its first quarterly drop in profits in 10 years in August, to Whole Foods Market Inc. and Williams-Sonoma Inc.
According to BIGresearch's August Consumer Intentions and Actions Survey, a whopping 76 percent of consumers said they were changing their spending habits because of high gas prices. And, there wasn't much differentiation between income levels either: 78 percent of consumers making less than $50,000 said they felt the pinch and 70 percent making more than $50,000 also said they were cutting back. Even well-heeled suburbanites are thinking twice about burning a $3 gallon of gas to buy a $4 latte.
There is no question that investors are paying close attention. A recent Certified Commercial Investment Member Institute survey ranked retail the least attractive of all commercial property types. The study pointed to sluggish consumer spending, rising cap rates and an excess of supply as well as little remaining upside in the sector.
In our Expert Q&A this month (p. 168), John McDermott, senior vice president and national director for investment brokerage observes that sales of retail properties are slowing, even in such recently sizzling markets as California's Orange County. There, deal volume was off 50 percent the first half of this year.
Of course every cycle brings opportunity — for those with the vision to see beyond the looming downturn. In Michigan, (see story, p 143), which has been suffering its own “one-state recession” for years because of the travails of U.S. automakers, two local institutions — the Gershenson and Kirco families — have banded together to build mixed-use projects. They are focusing on places beyond the auto economy, such as Grand Rapids and Ann Arbor, where the local fortunes have been decoupled from the auto industry. Other developers even see opportunities in and around Detroit. Some are targeting its wealthy suburbs. Others look to urban in-fill projects addressing pent-up demand for necessity retail including grocery-anchored centers, dollar stores and discounters.
What all the developers in the Midwest have in common is that they are laser focused on finding the right tenanting strategy for each market, i.e., not building cookie-cutter open-air lifestyle or mixed-use projects everywhere. Instead, they're figuring out which market segment is being underserved and filling a need.
Private-equity investors are also betting on the next cycle, buying into chains that largely did not benefit from the 2000s boom and which, with repositioning, streamlined operations and portfolios, could be ready for the next. The rearranging of the retail landscape by these deals certainly seems threatening at first blush. But it may be salutary — setting the industry to be more efficient, creating stronger tenants and positioning these operators for the next up cycle.
Those two trends combined — finding the right developments in a down market and the repositioning of weaker retail chains — could mean that even if retail sales continue to falter, smart retail real estate owners will be able to ride it out.
Retail Traffic Magazine