Skip navigation

Wants vs. Needs Shape Retail Outlook

To adulterate a Rolling Stones lyric, consumers can’t always get what they want, but they just might buy what they need. That characteristic of economic down-cycles explains why some retailers – and their landlords – will perform better than their neighbors this winter as the nation gropes its way through what is expected to be several quarters of recession.

Retail performance in the near term will be bifurcated between stores that cater to discretionary spending and those that sell basic necessities, according to a report published today by Colliers International, a global real estate services firm. “For the near term, retail sales will be divided between these two very different camps,” contends Ross Moore, Colliers’ executive vice president of market and economic research.

“Discretionary spending will be characterized by declining sales and store closures,” Moore writes in the company’s biannual Retail Real Estate Report. “Low-end retailers and discount retailers, however, continue to make steady gains.”

Those trends are already evident in sales, which slowed for the third straight month in October to a slim 1.4% increase from a year ago, excluding sales of vehicles and automotive parts. On the necessities end of the spectrum, grocery store sales by dollar volume were up 6.1% year-to-date compared with the same period in 2007. That was the greatest gain of any retail category except gasoline stations, which enjoyed an 18.5% increase by riding the wave of record fuel prices this summer.

Stores that live by consumers’ discretionary spending – particularly spending associated with homes sales or home improvements – felt the brunt of decreased spending. Furniture and home furnishing stores registered a 6.2% decline in sales so far this year, while building material and garden equipment stores suffered a 2.3% slowdown for the same period.

General merchandise group sellers registered 4.6% gains year to date, slightly slower than the 4.8% gain the sector rang up in the first 10 months of 2007, while department store sales declined by 3.4% from a year ago.

Other observers agree that retailers who cater to bargain-hunting consumers are the exception to the trend of slowing sales. “Discount retailers have become increasingly appealing to value-oriented shoppers,” says Sam Chandan, chief economist at researcher Reis Inc.

For retail landlords, the sales trend among tenants is beginning to show up in property performance. The average vacancy rate of 9.3% in the third quarter was up 1.8% from the end of 2007, Colliers found, while asking rent for shopping center space was down marginally to an average $18.44 per sq. ft., a decline of 0.2% from last year.

“Demand for retail space is running at a paltry one-quarter of last year’s pace, and new construction is down 50% from 2007 levels,” Moore says. Tenants have absorbed approximately 9.6 million sq. ft. through October this year compared with nearly 47 million sq. ft. of absorption in 2007, Colliers reported.

The outlook for retail space demand is sobering. Chandan points to a steady decline in retail jobs as a foreshadowing of space reductions that will occur as tenants let their leases expire or transition to smaller digs. Retail payrolls have declined by 328,000 jobs from a peak in March 2007. “Retailers generally have greater flexibility over payroll than they do over their long-terms lease commitments,” he says. “It's generally resulting in declines in retail employment at the metropolitan level, offering leading indicators as to where leases will ultimately be terminated.”

Anecdotal evidence from Colliers’ retail real estate practice suggests retailers are reluctant to open new stores, according to Pat Duffy, director of Colliers’ Retail Services Group. “Only single-digit percentages of originally-planned openings are coming to fruition, and we predict store-closings on a large scale come January, after retailers have slugged through the holiday peak season.”

The faltering economy, credit crunch and the net loss of 1.2 million jobs this year will weigh on consumers to make this holiday shopping season one of the weakest many retailers can remember, Duffy predicts. “Looking ahead to 2009, it’s highly unlikely conditions will stage any type of recovery until the second half of the year at the earliest.”

However, at least one economist believes the U.S. consumer will rally this year and help bring the economy back onto a growth track. Consumers have recovered enough spending power to take advantage of what will likely be spectacular deals in the end-of-year holiday shopping season, according to James F. Smith, Professor of the Practice at the Institute for the Economy and the Future at Western Carolina University.

This renewed spending power comes from the return of cheap gasoline. The price of oil has come down from its peak of $147 per barrel in July to $55 per barrel today. “That’s equivalent to a $300 billion tax cut,” Smith says. “That should have an effect for the great push on Christmas shopping. It certainly means that people are much less stressed.”

TAGS: News
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish