June 20, 2008
Retailers Backing Out of Shopping Centers
The combination of increased construction costs along with the prospect of slowing sales growth has led some retailers to pull out of planned shopping center projects. Others that continue to look for new locations are being more cautious before committing to undertake store construction, according to a report on The Dallas Morning News website.
Two store sites approved for Home Depot stores have been canceled as the chain is going through what Hunter Stansbury, senior real estate manager for the chain, called a “cooling-down period.”
John Weber Sr., president of Weber and Co., told an audience at an International Council of Shopping Centers event that commodity prices, not labor, have driven project costs up 20 to 25 percent so far this year.
While others have backed off construction projects, crafts retailer Michaels Stores is planning to open 45 locations this year, roughly the same number it has opened each of the last 10 years. Even so, Karen Slayton, real estate manager for the chain, said the company is proceeding with caution in choosing new locations this year. “We’re all expecting you to bring deals to us for 2010,” she said.
J.C. Penney real estate negotiator Viral Patel said the company is looking to delay any projects “if the growth isn’t going to be there.” The department store chain scaled back its plans for 50 new stores in 2008 to 36.
Discussion Question: Which factor – construction costs, availability of credit, prime locations, projected (slow) revenues, etc. – is most important in the decision by retailers to put off new store projects? What repercussions in the retailing industry do you expect from the increased availability of space?
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We’re finding a multitude of reasons for cap-ex cut backs (opening stores being only one line item in that decision). Not only have sales slowed, but consumers are showing that they’re shopping in new ways and in new places…as well as the fact that the Millenials’ (now swamping retail) buying habits are completely different than what we’ve seen over the last 25 years. Top that off with the green movement and inflation, and you’ve got a veritable retail harmonic convergence.
Consequently, retailers are re-thinking what those stores are going to look and operate like when the slow down is over. It’s really a perfect time to step back and say, “let’s slow down, think about this and decide what we’re going to be when this is over.” In other words, let’s hike up the innovation budget and move on to the next generation of retail.
With almost no exceptions, America is overstored. Almost all national chains are built out, with most new locations merely cannibalizing the volume. Why hurt your own comp sales and raise your overhead? Instead of building new stores, why not improve your infrastructure, pay back your debt, and raise your dividends?
If America is over-stored and if consumers are pulling back, then retailers should be cautious about where and when they open new outlets. However, shouldn’t they also be cautious all the time about where and when they open new outlets. Maybe there has been a period of “open it and they will come” and retailers are pulling back on that strategy.
Another factor: Good opportunities can now be had in existing locations vacated by other retailers. Why build from the ground up when you can take over a site vacated by Albertsons or Linens N Things for far less cash? Prime mall locations that were formerly Sharper Image or Baby Gap are ripe for the picking, and landlords are looking to make deals.
Developers need more for their spaces because of rising costs and market projections they did three to five years ago. Retailers live in the now and they want to pay less for space because it is not producing as much per square foot as in the past. Consequently, the gap between what is needed by the developers for their new spaces and what it is worth to the retailer is way beyond the norm and that gap is producing a lot of ‘no deals” and “broken deals.”
I don’t know first hand what their reasons are, but I sure know what their reason should be: we have too many stores and not enough differentiation. Among the many, there many real estate mistakes which will eventually appear under the ‘underperforming’category when the retailer files for re-organization.
A recent article quoted: ‘”We have 19 1/2 square feet [of retail space] for every man, woman and child in this country,” [retail industry consultant Howard] Davidowitz says, suggesting that’s nearly double what is needed.’ Surprise!
There are too many stores with the wrong mix of products, poor pricing and poor inventory. Americans today want value. This is why Wal-Mart is so large and their competitors are not. Americans need better retailers that support a product position and customer service level they are looking for, not more retailers that deliver the same old thing. Those companies that recognize this will continue to prosper and grow. Those that don’t will perish.
It’s always interesting to hear “the sky is falling” sentiment even in the most prosperous time in civilization. Yes, a few shopping centers have been delayed six months to a year in fast-growing sunbelt states. This was expected after a record-breaking real estate expansionary period.
The following factors must be considered:
– Marketshare gains
– Continued U.S. population growth
– Growing Affluent upper-class
– Under served urban areas
We’re seeing retailers such as Target and Costco continuing to do well in tough economic times. Many big-box retailers have done well in Brooklyn where it was thought to be a risk to build. This market is in its infancy and the slowing economy will make it more economically viable to continue to invest in these older urban corridors.
Growing affluence in America is giving many consumers a large amount of discretionary income. A huge influx of immigrants from around the world continues to add to America’s population. The Super store discount segment will continue to steal marketshare from the Krogers, Safeways, and Albertsons on the world. Much of Sears Holding’s losses will be advantageous to appliance carrying retailers. Lowes may benefit from the weakness of Home Depot and their market share losses.
The reality is that there are thousands and thousands of stores still to come in the next decade. The U.S. is benefiting from the sophistication of these world class retailers and their efficiencies. Hold on and enjoy the wave of prosperity!
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We’re finding a multitude of reasons for cap-ex cut backs (opening stores being only one line item in that decision). Not only have sales slowed, but consumers are showing that they’re shopping in new ways and in new places…as well as the fact that the Millenials’ (now swamping retail) buying habits are completely different than what we’ve seen over the last 25 years. Top that off with the green movement and inflation, and you’ve got a veritable retail harmonic convergence.
Consequently, retailers are re-thinking what those stores are going to look and operate like when the slow down is over. It’s really a perfect time to step back and say, “let’s slow down, think about this and decide what we’re going to be when this is over.” In other words, let’s hike up the innovation budget and move on to the next generation of retail.
With almost no exceptions, America is overstored. Almost all national chains are built out, with most new locations merely cannibalizing the volume. Why hurt your own comp sales and raise your overhead? Instead of building new stores, why not improve your infrastructure, pay back your debt, and raise your dividends?
If America is over-stored and if consumers are pulling back, then retailers should be cautious about where and when they open new outlets. However, shouldn’t they also be cautious all the time about where and when they open new outlets. Maybe there has been a period of “open it and they will come” and retailers are pulling back on that strategy.
Another factor: Good opportunities can now be had in existing locations vacated by other retailers. Why build from the ground up when you can take over a site vacated by Albertsons or Linens N Things for far less cash? Prime mall locations that were formerly Sharper Image or Baby Gap are ripe for the picking, and landlords are looking to make deals.
Developers need more for their spaces because of rising costs and market projections they did three to five years ago. Retailers live in the now and they want to pay less for space because it is not producing as much per square foot as in the past. Consequently, the gap between what is needed by the developers for their new spaces and what it is worth to the retailer is way beyond the norm and that gap is producing a lot of ‘no deals” and “broken deals.”
I don’t know first hand what their reasons are, but I sure know what their reason should be: we have too many stores and not enough differentiation. Among the many, there many real estate mistakes which will eventually appear under the ‘underperforming’category when the retailer files for re-organization.
A recent article quoted: ‘”We have 19 1/2 square feet [of retail space] for every man, woman and child in this country,” [retail industry consultant Howard] Davidowitz says, suggesting that’s nearly double what is needed.’ Surprise!
There are too many stores with the wrong mix of products, poor pricing and poor inventory. Americans today want value. This is why Wal-Mart is so large and their competitors are not. Americans need better retailers that support a product position and customer service level they are looking for, not more retailers that deliver the same old thing. Those companies that recognize this will continue to prosper and grow. Those that don’t will perish.
It’s always interesting to hear “the sky is falling” sentiment even in the most prosperous time in civilization. Yes, a few shopping centers have been delayed six months to a year in fast-growing sunbelt states. This was expected after a record-breaking real estate expansionary period.
The following factors must be considered:
– Marketshare gains
– Continued U.S. population growth
– Growing Affluent upper-class
– Under served urban areas
We’re seeing retailers such as Target and Costco continuing to do well in tough economic times. Many big-box retailers have done well in Brooklyn where it was thought to be a risk to build. This market is in its infancy and the slowing economy will make it more economically viable to continue to invest in these older urban corridors.
Growing affluence in America is giving many consumers a large amount of discretionary income. A huge influx of immigrants from around the world continues to add to America’s population. The Super store discount segment will continue to steal marketshare from the Krogers, Safeways, and Albertsons on the world. Much of Sears Holding’s losses will be advantageous to appliance carrying retailers. Lowes may benefit from the weakness of Home Depot and their market share losses.
The reality is that there are thousands and thousands of stores still to come in the next decade. The U.S. is benefiting from the sophistication of these world class retailers and their efficiencies. Hold on and enjoy the wave of prosperity!