Commercial Development News - Appraisal Development International

A Not-So-Long Road to Recovery for Retail Real Estate?
JLL Retail's Perspective on Recovery, Plus Shopping Center and Retailer Executives' Expectations for the Industry

By Sasha M Pardy
CoStar Group
Published: Aug 26, 2009

Jones Lang LaSalle Retail last week issued a "perspective on recovery" for the retail sector in which JLL Retail President and CEO Greg Maloney predicted that the recession will bottom out during the last quarter of this year, to be followed by the beginning of revitalization for the retail industry in first quarter 2010.

JLL Retail's prediction for a gradual recovery in the retail industry is based on a number of key economic indicators that the firm says are slowly stabilizing. First, job losses are slowing -- the average monthly job loss for May through July was about half the average decline for the previous six months and there was a slight improvement in the unemployment rate during July.

Second, the Fed's TALF program and the results of May's stress tests for the country's largest banks have financial institutions showing improved stability, however, capital markets are "still frozen" and "There is a great possibility that cap rates will continue to increase and eventually cement a loss in the value of assets," warned JLL Retail.

Third, while the retail industry's health closely correlates to the housing market, JLL Retail is encouraged by June's improvement in existing home sales and single-family housing starts.

Fourth, JLL Retail said it's a positive sign that there was a less drastic decline in GDP than was expected during second quarter. Last, the Reuters/University of Michigan Index of Consumer Sentiment has been on an upward climb since first quarter, ending up significantly better than where it was at June 2008.

In its report, JLL Retail found that the West South Central region of the country (TX, LA, OK and AR) surprisingly has proven to be the strongest performing region during this recession and predicts that Texas in particular, due to its lack of a major housing bubble and strong energy industry, will most likely to emerge from recession the earliest. A focus group study by JLL Retail revealed that Texas was the highest performing in terms of sales, and the least affected by unemployment. This focus group also found that, while New England was the first region affected by the recession, it would likely be the second region to come out of it. Regions JLL Retail expects to emerge at the bottom of the recovery will likely be the East North Central (MI, OH, IN, IL and WI) and Pacific (WA, OR, and CA) states.

Paradigm Shift Among Consumers...
"Consumer confidence will play the biggest part in our return-to-normalcy," noted Maloney, adding that consumers' "psychology and willingness to spend" will determine the speed and intensity of the recovery.

For now, said JLL Retail, consumers are driven by price consciousness and have elevated their core values, such as the importance of family and environmental sustainability. John Bemis, JLL Retail's director of leasing and development, drove home the shift in shopper values, "The Lexus in the Wal-Mart parking lot is no longer an anomaly as both upper- and lower-income shoppers seek to capitalize on lower prices and stretch their dollars further.â€

It remains to be seen if this behavior will dissipate as the economy improves, or if a longer-term fundamental shift in buyer behavior has come to light. This being said, Maloney said that value retailers, including Wal-Mart, warehouse clubs, dollar stores, and other discounters, "will be at the forefront of the recovery."

Retailers that deliver a unique "experience" to shoppers will also prevail, said JLL Retail. These could include the likes of Bass Pro Shops and IKEA as well as those with "try before you buy" experiences, such as Apple and AT&T stores. Additionally, as consumers continue to hold back on big ticket items, they are beginning to give in on "little splurges," so retailers offering "affordable luxuries," such as salons, beauty supply shops, and quick service restaurants will also be on the short list for recover, said JLL. The return to "family values" has retailers catering to the "do-it-yourself" crowd with specialized concepts such as gardening and cooking; and in relief to one of the retail store sectors that fell first, this trend also includes consumers heading back to home improvement stores, added JLL.

...And What It Means for Retailers and Shopping Centers

"A new strategy toward tenant mix is crucial," noted Maloney.

Retailers should no longer "resist being placed near the likes of Wal-Mart," said JLL. The Class B and C shopping centers these discounters typically reside at have a unique opportunity to increase shopper traffic and gain a stronger market standing on this road to recovery, Maloney added.

JLL recommended that leasing agents should fill their centers with retailers that meet the "emerging needs" and offer experiences to consumers to draw more shoppers to their centers. For shopping center managers, this includes items that appeal to families (play areas, kid's and mom's clubs, concerts, character events, and more), holding "how-to" classes, and holding events or making efforts that raise money for the community. Additionally, JLL suggested managers make their shopping centers active on social networking mediums, create shopper loyalty programs; in any case all of these traffic drivers require shopping center managers and retailers to work more closely together.

Shopping Center and Retailer Executive Expectations

In two other studies that provide additional insight on prospects for recovery in the retail real estate sector, the International Council of Shopping Center's (ICSC) most recent shopping center executive survey revealed that overall shopping center business conditions improved for the fifth consecutive month in July, reaching their highest level since June 2008. However, the index still indicates deteriorating market conditions for the industry, with capitalization rates and rent spreads at a much less favorable point than customer traffic, occupancy rates and retailer sales.

Perhaps more importantly, shopping center executives' expectations for the next six months improved significantly in July, nearing a level where shopping center executives reach a consensus that industry fundamentals will be positive during this period. Driving this improvement is their expectation that occupancy rates, customer traffic, and retailer sales will become favorable at some point in the next six months.

In a similar recent survey of executive of major retailers from KPMG, 70% of executives expect industry business conditions are most likely to improve in 2010, however, 44% believe that a full U.S. economic recovery could be as far off as 2011 or later. Looking closely at the drivers of this recovery, 84% of executives expect the job market in retail to improve in 2010. In a confirmation of the lack of retailer interest in new stores that landlords have experienced during this recession, 91% of executives said their companies cut back on capital expenditures this year. In conclusion of the survey results, KPMG said, "While the Conference Board's Consumer Confidence index continues to languish, the retail execs surveyed are cautiously optimistic that we've seen the economic bottom and 2010 will begin trending favorably for the industry."