Fear and Loathing in Business Media (Retail Real Estate Edition)
First, I admit I have a bias against the national weekly magazines. They have created a fishbowl of ideas that are self perpetuating of liberal orthodoxy and dour negativity about our society that can be rather off putting outside of a Manhattan Starbucks.
But that being said, Newsweek is also struggling to find any readership under the age of 50 outside of a doctors waiting room. They think that to get readership they have to boil complicated national issues down to soundbites that have a punch. (Almost as bad as the national evening news.) Oh, and these newsweekly are writing two weeks out and trying to stay current in an internet world. Good luck on that.
Well, senior Newsweek editor Daniel Gross, decided that in a multi-trillion dollar economy that 3 major chains going out of business or reducing some stores is the trend that signals the collapse of the retail real estate market. Lets look at the scorecard. He picks CompUSA, a company that has essentially been going out of business for 3 years and whose narrow niche has been overtaken by a growing Best Buy as an example of the impending retail collapse in one of the hottest sectors of the market.
The next indicator is Macy’s who has a history of large purchases and consolidation in markets with overlap. Sure that is an indicator.
And the final two, Pacific Sunwear’s Demo and Talbot’s brand extentions into Mens and Childrens stores were just bad business decisions. Brand extensions are notorious for sounding great in the marketing meetings and failing in the market place.
But in a vain attempt to slow Newsweek’s dying circulation, rash headlines like The Other Real Estate Crisis are put out there. If a growing retail sector is in crisis, what is the status of Newsweek and it’s declining circulation? A full blown capitulation?
Malls aren’t turning into haunted houses just yet, but they may be on their way, thanks to the recent wholesale shuttering of national retail chains. (This column’s long-standing guiding principle has been that when a naturally observed event happens three times in relatively short time-frame, it’s a trend. Like, for example, egregious right-wing hacks getting richly undeserved columns in large-circulation print publications.)
First came CompUSA, the electronics retailer that managed to make Carlos Slim Helu, one of the world’s wealthiest man, a little less wealthy. Helu spent more than $800 million to buy the computer and electronics chain in 2000. But after years of losses, the Mexican billionaire threw in the towel on the brick-and-mortar business. Last month, CompUSAannounced it would shut down its remaining 103 stores. The week after Christmas, Macy’s, whose 850 department stores frequently anchor malls, announced it would close nine large stores in Indiana, Texas, and Ohio.
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Comment by David Bodamer on 11 January 2008:
Wow. That’s something. I like the article even starts off defining commercial real estate as “office” and retail real estate as “malls, strip malls, big boxes,” when, in reality, commercial real estate is the broader term for all the income producing sectors including industrial, multifamily and hotels.
I do think there are real concerns on the commercial side and 2008 will be slow. But there are also many, many reasons to believe the pain won’t look anything like what’s happened on the residential side.
CMBS loans, while they may have some issues and did get too aggressive, don’t have the same issues as residential loans. There’s no such thing, for example, as a no-doc or low-doc commercial real estate mortgage that I’m aware of. Further, the pools of loans are scrutinized to a much greater degree because the average loan sizes or so much larger and there are fewer loans put into CMBS pools than RMBS pools.
With retail real estate specifically, retailers are definitely slowing expansion plans and some are closing stores, but it isn’t a flood tide yet. The retail real estate industry could absorb some vacancies without it being a disaster. Developers, at least anecdotally, do seem to be scaling back projects, slowing down the pace of development and even pulling the plug on some–so that eases concerns about overbuilding I think.
Overall, I also don’t think most observers realize that retail sales and retail rents don’t have a direct correlation. Most retailers pay fixed rents, only kicking a percentage of sales if they have really, really good years. Further, most retailers are signing long-term leases–5 years or more. While it’s certainly not great to have dark stores, the rent, in some cases, will still be coming in.
Overall, I don’t expect 2008 to be an easy year for the sector, but short of catastrophic numbers of bankruptcies and store closures, it’s not going to be a disaster.
Pingback by TrafficCourt » Blog Archive » Retail Real Estate’s Outlook on 11 January 2008:
[...] now predicting major doom and gloom for retail real estate. (Hat tip to Real Estate Bloggers for pointing it out.. The Wall Street Journal this week also ran a piece with some dire predictions. (If you click to [...]
Pingback by The Odysseus Medal competition — Voting for the People’s Choice Award is open | BloodhoundBlog: Real estate marketing and technology blog | Realtors and real estate, mortgages, lending, investments on 13 January 2008:
[...] – Better start makin’ copies of the Trulia-natorTom Royce — Fear and Loathing, Fear and Loathing in Business Media (Retail Real Estate Edition)Morgan Brown — Our Conundrum, Mortgage Interest Rates and Our ConundrumBrian Brady — [...]
Comment by Marcus on 15 January 2008:
2008 might be a slow year for a lot of national credit tenants, but with tremendous change comes tremendous opportunity. Deals are getting done in centers once occupied by Bombay, Blockbuster, Hollywood Video, etc. I think its a credit time for independent operators that have sound backing to get better deals. In the past, landlords had choices, but now spaces are likely to sit vacant longer and landlords are going to start offering more incentives.
There are markets that will continue to do well even with a downturn. New York City is a hotbed for European Retailers and money. As long as exchange rates remain favorable and consumers are still shopping, New York will see many international retailers penetrate the market.
Pingback by Media, the Market and the Mentality of Many Buyers - Atlanta Real Estate Blog on 16 May 2008:
[...] that exists in a buyers market, but, it’s somewhat overblown in terms of reality. The Real Estate Bloggers gave an example here of how the media feeds fear in real estate and let me set my explanation up by sharing with you an email I received yesterday from an active [...]