Wednesday, January 9, 2008

WSJ asks: are we on a retail real estate cliff?

There was a thought-provoking article in the Journal today about whether retail real estate is one the same cliff that residential real estate is. After all, Centro Properties teeters on the edge, Talbots is closing some stores, The Bombay Company has closed and even Starbucks finally admits that it has overbuilt. (How much are rents softening though? I'm not hearing much about this yet.)

Just like residential, it depends. It is often hard to generalize national trends in retail. Rule of thumb: Retailers always want to be where the action is. If an area is hot then there should be no worries. But if the area is overbuilt (which you see a lot of -- you may see in some markets absorption problems) or the market is in the dumper, then, well, not so much. I'm hearing of plenty of activity in some markets. And not everyone is slowing down or stopping. I know I read somewhere yesterday that Costco is continuing its expansion plans.

Another thing: as the article says, real estate (and especially retail) is cyclical. Not that I am a market-timing guru or anything, but it makes sense that, assuming for the sake of argument that we are on some general downtrend, to start planning a new development in a good location so you will be online at the right time. (Of course if you go beyond planning you have to convince lenders and investors of your strategy and you run the risk of empty dirt or worse yet empty storefronts. This is the importance of, as the story says, holding power.) Unless you think the next great depression is coming...and I don't.


David Bodamer said...

I just got back from the CMSA show and there was a panel featuring economists from Torto Wheaton, REIS and PPR (who is largely quoted in the WSJ story). What was interesting is that there were very, very different views on which sector of CRE was most at risk.

In regards to retail, PPR said the same thing they say in the article. They're very, very wary and they say its because there's been too much retail construction. But neither REIS or Torto Wheaton had that view. In fact, both said that they thought retail would skate by because of how restrained retail development has been.

It raised an interesting question to me which is, do we actually know how much retail space has been delivered in the past few years or not? It seems like the real estate economists are using different numbers and therefore have different expectations going forward.

This is something I intend to have RT investigate in the coming month or so.

David Stejkowski said...


Thanks as always for your keen insight. Except perhaps for markets where there has been the same exuberance as residential, I think retail is not at all as suspect. You will probably not have the same absorption issues. I look forward to seeing what you dig up in RT in deliveries.