As business journalists covering retail real estate, one of the toughest tasks we have is attempting to accurately gauge the mood of the industry. Retail real estate developers by nature are an optimistic lot. And there has certainly been a lot to be happy about through this industry's profitable history.
Emerging from ICSC's RECon Spring Convention in Las Vegas, it seemed as if the retail real estate industry was in very good shape despite everything that had transpired since the credit crunch took hold in 2007. We heard consistently that leasing activity remained brisk and that most companies had proven themselves immune from the troubles gripping the broader retail sector. Long-term leases meant that landlords had some stability. It also meant that in instances where leases were coming up for renewal, landlords could still negotiate rent bumps because of how low the base rents had been.
Most glaringly, what many people told us was that while things certainly weren't easy in the retail real estate industry, the turnaround was just around the corner. Some even insisted that the show itself reflected the upswing and that by the fourth quarter, things would be absolutely humming again.
Now we feel like we got the wool pulled over our eyes. In the months since, the pace of store closings has accelerated. Projections are that both the back-to-school and holiday shopping seasons will be incredibly weak. Inflation concerns remain. A damaging second half of the year, in turn, could lead to a new batch of closings in 2009.
To be sure, the media can have a tendency to hone in on negative news, as evidenced by our cover image that presents a sampling of some of the headlines in just the past two months. In reality, there remain signs of positivity. Most REITs continue to report strong earnings and rental increases. As a result, aside from Centro Properties Group, no major owner is facing serious problems. On the whole, the public REITs are still making healthy profits.
However, it is becoming clear that as the credit crunch and slow economic conditions continue their march — and there is very little reason to expect things will turn around soon — it is taking its toll on smaller companies. Take the case of one developer that contacted us this month. Before the credit crunch set in he did what a lot of smaller investors did. He bought a small shopping center anchored by Starbucks. That sort of deal was very popular back then. In fact, Starbucks-anchored centers often fetched cap rates 100 basis points below market averages because they were viewed as such strong plays.
Look what's happened today. It turns out, his Starbucks is one of the 600 slated for closing. That news came after he lost a cell phone shop. And, in turn, the center's final tenant, a national sandwich franchisee, threw in the towel when he learned of Starbucks's decision. As a result, a center that looked like a strong bet 12 months ago will soon be 100 percent vacant. We're sure that this story is not unique. And what recourse does that leave owners in this position?
Ultimately, we don't think these tough times have ended. In fact, they may continue to get worse. The sooner the industry accepts that reality, the better off it will be.