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A view through rose-colored glasses

LAS VEGAS — Thousands of dealmakers, always eternal optimists, descended on this desert oasis in late May for the annual International Council of Shopping Centers (ICSC) Spring Convention. Their responses to the issues of the day were hardly surprising. Retail bankruptcies? Don’t fret, it’s a shakeout that is welcome and long overdue, an opportunity. The energy crisis? It’s a West Coast problem that will be resolved in short order. Dwindling corporate earnings? Come on, the rate of productivity is just returning to normal levels, a soft landing at the worst.

But beneath that upbeat exterior, which has become synonymous with real estate folks, the mood here on the convention floor was as flat as day-old pop. Given the recent spate of retailer bankruptcies, courting prospective tenants just became more hazardous.

Could it be that for the past several years — driven by a supercharged economy — we’ve lulled ourselves into a false sense of security? Has the lending community really refrained altogether from making nutty deals and have developers ceased to chase bad projects? Time will tell, but the answer will likely not be black and white. History shows there will be winners and losers.

The capital markets mandate fiscal restraint we are told, but weren’t these the same capital markets that created a frenzy over the dot-coms that led to their unprecedented stock valuations and the subsequent tech-sector crash of last spring?

Mounting debt

As convention-goers were walking the floor, the American Bankruptcy Institute (ABI) reported on May 23 that the number of bankruptcies filed during the first quarter of 2001 rose 17.5% over the same period a year ago. Filings rose from 312,335 to 366,841, reported ABI, and the statistics show a significant increase in consumer filings and a modest increase in business filings. “The economic slowdown beginning last fall, combined with historic high levels of consumer debt, mean that filings will reach a new peak this year,” said Samuel J.Gerdano, executive director of the ABI.

That’s not encouraging news for the retail industry, where the war of attrition has claimed such venerable retailers as Montgomery Ward and Bradlee’s, and overshadowed the success stories of Lowe’s, Target and Kohl’s. Add to the mix weak corporate earnings, widespread layoffs, a pullback in technology investment and higher energy prices, and you begin to see why the “R” word keeps creeping back into the discussion. Outside the real estate bubble, the general consensus now is that the current economic malaise we find ourselves in will carry well into the third quarter of 2001.

A softer view

Meanwhile, the National Retail Federation (NRF) based in Washington, D.C., has painted a somewhat rosier picture, declaring in an April 12 news release, “NRF’s retail sales outlook predicts economic recovery toward the end of 2001.” The NRF’s chief economist, Rosalind Wells, anticipates that consumer spending will grow 3% this year compared with 5.3% the past two years. She said the lack of a true decline in economic activity and the positive employment and income picture support her assertion that the U.S. has avoided a true recession.

“The steep deceleration in economic activity is being caused by a sharp cutback in business investment precipitated by softening corporate profits, a working down of excess inventories and slower consumer spending,” the NRF concluded in its executive summary. Encouraging signs that may head off a recession include continued growth in employment, income and consumer spending.

But a spate of layoffs in Corporate America this spring doesn’t quite mesh with that conclusion.

Against this backdrop of a slowing economy, grocery-anchored shopping centers are in great demand. They’re recession-proof, developers and investors repeatedly say to me. The conventional wisdom is that even in a slumping economy, people need to eat. But there are no absolutes in this niche either, and given the consolidation that is taking place in this supermarket sector, I wonder if someday we will be writing about owners that feasted on too many grocery stores and were left holding the bag.

Ultimately, real estate development is a combination of vision and a leap of faith. Perhaps my problem is that I just need a rosier pair of glasses.

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