Broad-Based Retail Recovery Underway

We have lift-off, of the retail recovery, anyway. That’s what the recent results of two retailers – released the same day last week – at opposite ends of the consumer curve seem to indicate.
Luxury goods bellwether Tiffany [NYSE: TIF] reported a 22% jump in net sales to $633.6 million In the three months ended April 30, 2010. Net earnings from continuing operations increased 135% to $64.4 million, versus $27.4 million, and per diluted share rose 127% to $0.50 from $0.22 last year.
“Our business performed exceptionally well in the first quarter, continuing the broad-based improvement we began to experience in the second half of 2009,” said Michael J. Kowalski, chairman and chief executive officer.

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>>Ben Johnson l 6.01.10

OKC’s Retail Sector is Feeling the Heat

Oklahoma City’s retail market is now the first sector to feel the effects of the broader national economic malaise, according to a new study, “2009 Mid-Year Oklahoma City Retail Market Summary,” by Price Edwards & Co.
The survey provides a good bellwether for the local retail market, as it covers the occupancy of 231 retail centers (in excess of 25,000 sq. ft.) containing about 28.6 million sq. ft. of space, as well as 232 freestanding buildings containing more than 12 million sq. ft.
Bankruptcies of national tenants including Linens ‘n Things and Circuit City have forced large spaces back on the market. The net effect is a higher vacancy rate, which jumped to 14.4% over the last six months compared to 13.0% at year-end 2008. Contributing to the increase were significant vacancies at Crossroads Mall and Heritage Park Mall, and a generally weaker retail market.
The number of tenants available to backfill these larger spaces is limited and, perhaps more telling, the deal terms on both rate and tenant improvement costs are significantly worse. “When these larger tenants fail, landlords’ economic issues are further complicated by the co-tenancy clauses of other tenants which typically allow them to pay reduced rent and possibly terminate their lease unless a suitable replacement tenant is found in a rather short period of time,” notes the report.
A large number of strip centers in the market—under 25,000 sq. ft.—have small spaces vacant. Price Edwards estimates there are some 3 million sq. ft. of these properties in the market that are not being surveyed. And the size of recent small strip construction has increased to the 15-20,000 sq. ft. range. Many of these have some vacancy, and they must be considered when evaluating the OKC retail market.
On a positive note, several regional tenants—namely Conn’s and Half Price Books—are moving into the OKC retail market. And the city continues to be a magnet for upscale grocers, national fitness operations, and a handful of other tenants not presently operating here, all of which are targeting late 2010 or 2011 store openings.
Retail rents, however, are feeling the pinch, with landlords receiving more rent reduction requests from many local and national tenants. “There is more art than science in analyzing these requests and balancing the needs of the tenant versus the needs of the landlord. Needless to say, we’re seeing downward pressure on rents for both new deals and renewals,” notes the report.
According to Price Edwards, the retail investment sales sector is in dire straits. During the first half of the year, no sales of retail properties in excess of 25,000 sq. ft. were recorded. This compares to 7 sales totaling $19,100,890 in 2008 and 13 sales in 2007 at well over $200 million.
“The condition of the underlying retail market, restricted access to capital, rising capitalization rates and a continued gap in expectations between buyers and sellers have created a very difficult sales environment. Without more than 30% equity, it is very difficult to finance a retail project. This eliminates any number of buyers. Although there have not been sufficient sales to establish a market, capitalization rates are estimated to have risen close to 200 basis points over the last year. This rise has been difficult for sellers to digest, particularly if the operating performance of their property hasn’t changed.”
Several large properties, including Quail Springs Marketplace and Council Crossing, have been on the sales market for some time but have not traded. Certainly the pool of qualified buyers has diminished significantly.
While there is strong demand for distressed properties, the general health of OKC’s retail market has limited the number of opportunistic buys. Also, while there are few securitized loans coming due on retail properties in the local market in the next two years, there could be a few forced sales in the near term.
Importantly, Price Edwards sees the bid/ask spread narrowing in the future, with sellers’ expectations beginning to adjust to the new market realities. “Consequently, we foresee a handful of sales over the last six months of the year and should see a rise in activity in 2010 as capital becomes more readily available.”
Economic conditions have put a strain on new development, with the exception of some smaller strip centers and the finishing elements of a few larger projects. In fact, a number of sizable projects are planned but currently on hold. The Shops at Del City is the only sizable development currently underway.
The second half of 2009 bodes a few ill winds as well. “For the rest of the year, we predict the failure of several more national tenants; a few local tenant failures; continued small tenant leasing activity albeit at a slower rate; and, further downward pressure on rents,” says the report.
Still, the OKC retail market will continue to outperform the rest of the country, which in turn should attract retailers in need of a little stability for a change.
>>Ben Johnson l 7.10.09


Retail Not Out of the Woods Yet

According to a recent report, American retailing is undergoing massive changes that go well beyond the pains produced by the current economic downturn.
The report, “Done Shopping – Structural Shifts in the U.S. Retail Sector and Their Implications for Real Estate Investment,” notes that retailers and investors should not assume that an economic uptick will automatically bring back the halcyon days or yore. Rather, “the ongoing economic meltdown masks more enduring structural changes that are transforming the retail landscape,” says report author Andrew J. Nelson, vice president of research at RREEF, the alternative investment management arm of Deutsche Bank’s asset management division.
Nelson predicts that even once economic recovery is in full swing, retail sales growth is likely to be just half of that achieved in recent years. Also, and somewhat troubling, he notes that fewer retail chains will be expanding, and many will continue their recent downsizing of both store counts and sizes. “The sector, therefore, will comprise fewer retailers and less retail space than exists currently. As a result, rent increases will be lower than what shopping center owners have grown to expect, while vacancies will be higher – and many existing centers will be forced to close for lack of tenants and shopper support,” says Nelson.
Where there is darkness, there is also light, and the U.S. is well positioned to assume retail supremacy in the future. “Under almost any conceivable scenario, both the economy and population will grow faster in the U.S. than in any other major industrialized nation, supporting renewed retail spending growth. Together with faster rates of asset obsolescence of retail space relative to other property types, this spending will support some new development.”
Still, developers and property owners face the downside of much slower – and different – growth patterns compared to those in recent years.
Here are the report’s key conclusions:
• Consumer spending, once it resumes full growth around 2011, will expand at only half the
rate of recent years without the prop of rapidly rising household wealth boosted by the
housing boom and the stock market rally earlier in the decade.
• Retail sales growth also will moderate due to demographic shifts to age cohorts that
spend relatively less, and shifts to income groups who spend less of their incomes on
discretionary retail goods. Higher taxes and greater shares of household budgets going to
non-retail spending are also likely in the offing, further depressing retail sales.
• Fewer retailers will survive to fill the nation’s shopping centers, the result of the economic
downturn, reversal of retail over-expansion, and relentless competitive pressures to wean
out underperforming concepts and operators. Retail chains also will be leasing less space
per store as they seek more efficient formats, reversing longstanding trends toward ever increasing store sizes.
• Near-term retail spending will swing away from luxury goods, especially home-oriented
items, and focus more on everyday necessities, services and value-oriented discretionary
spending. Discount retailers will benefit at the expense of full-price merchants.
• Shifts in the regional distribution and ethnic composition of future population growth
portend further shifts in the location and nature of retail demand, providing new
development and repositioning opportunities, as well as challenges to existing centers.
Ultimately, Nelson says there will be a growing divide between retail’s winners and losers.
“Truly dominant centers should thrive at the expense of those with inferior locations and tenant mixes. The downstream impact will be a wave of shopping center closures, mirroring the shakeout among the national retail chains. The nation’s most oversupplied markets will be especially vulnerable. With chain stores the primary source of tenancy for shopping centers, and tenant losses concentrated in the weakest centers, a failure of 10% of retail centers in the near term appears possible.”
>>Ben Johnson l 7.07.09