Post by Sunny Sajnani
For all of 2011, retail sales totaled $4.7 trillion (yes with a T)! That was a record set for an annual total. Sales posted a gain of 8% over 2010 and a 20% surge from the bottom of the recession. The numbers are very encouraging for retailers as these figures confirm the economy is strengthening. And when retailers are happy… commercial retail developers (and commercial real estate finance professionals) are happy.
Not so fast, Mr. Let’s-Go-Build-A-Spec-Retail-Property! December’s holiday season was not so merry. In fact, it was the first drop in sales month-over-month since May 2010. That’s right… 2011 was the first year EVER, November figures were higher than December’s. Sales decreased by 0.2% compared to last year’s increase of 6.4%. Although December posted $400 billion in sales, why was there a decline from November?
The MAJOR factor that drove the decline was people spent like crazy in November as retailers were forced into heavy discounting to attract shoppers. Consumers raised their borrowings in November by the most in a decade (must have been something in the turkey stuffing)!! When Mr. & Mrs. Doe were hit with a huge credit card bill in December, they decided to go cheap on Christmas gifts. Retailers responded with massive sales.
So what does this mean for real estate professionals? It means that the economy is still trying to figure itself out. Continued job growth is necessary to boost consumer confidence. Most likely, there was seasonality adjustment of job growth and employees were unsure of their positions toward the end of the year—hence the decline in spending.
Metropolitan Capital Advisors’ outlook on retail: Not too much new development in 2012 until retailers can predict spending habits and profit margins improve (less Red Apple Days). New leasing velocity (especially with anchor and large tenants) will be flat. Today, retailers and tenant reps are concentrating on household incomes more than number of households when selecting new locations. This flight to quality (rather than lower rental rates) is pushing new “deals” to infill locations similar to the new high demographic “By Choice” apartment renters. Retailers are also downsizing with new innovative concepts. Big box retail development is not quite what it used to be.
Despite the slower-than-preferred recovery of the commercial retail property sector, long-term fixed rate debt is now readily available for stabilized properties. If a fortuitous acquisition is in your gun sights, there are bridge loans, mezzanine debt and equity joint venture money available where pricing will correlate to the risk involved. MCA recently completed several built-to-suit and owner-occupied construction loans. Our firm has also received proposals from both debt and equity providers who were ready to step up on new retail development transactions, HOWEVER, promised leases are still out for signature. Sound familiar? We might all have to hold our breath until 2013 for significant multi-tenant preleasing to materialize to justify new construction. Stay tuned!!!