Retail Forcast:
A Partly Cloudy Outlook

By Joseph Dobrian

Despite an apparent recession, the overall retail scene will stay lively for the rest of the year, with development slowing but certainly not stopping. According to the International Council of Shopping Centers (ICSC), we'll see a high number of store closings this year: probably more than 5,700, which would be the highest number since 2004. Home furnishings stores seem to be taking the worst hit, due to the recent woes of the home mortgage market. Several jewelry stores are experiencing some pain as well, and a couple of the larger retail real estate owners have reported difficulties in discharging their debts. But the good news is that retail has not overbuilt itself to the extent that we saw in the last cycle, and most retailers and property owners should be able to ride out the squall.

No Overbuilding This Time

"We're in a good position despite all of the negative economic news that has been reported lately," says Malachy Kavanagh, vice president of communications and external affairs for ICSC. "Some of the excesses that have caused the industry problems in past decades, such as overbuilding by developers and unduly aggressive store rollouts by retailers, have largely been reined in over the past few years. In this cycle, the supply of new retail and shopping center space coming through the pipeline is broadly in line with consumer and retailer demand. In fact, during the past five years or so the annual growth rate of new shopping center and retail space has been on the order of 2% to 3%, which is below the annual growth rate of retail sales. This means that the industry can absorb a slowdown in the rate of store growth without taking a really hard knock on occupancy and rental growth."

If growth continues, where will we see most of it, and what form will it take? According to figures provided by Prudential Douglas Elliman, the Washington, D.C., metro area (including prosperous suburbs such as Alexandria, Va., and Silver Spring, Md.) is the fastest growing retail market in the U.S. Los Angeles is second, and the nearby markets of San Diego and Orange County also rank in the top 10. Dallas, Atlanta, Houston, Philadelphia, Chicago and Portland (Ore.) round out the rankings.

The main trend in development is toward "lifestyle centers" and other mixed-use communities in urban or suburban locations. Development of traditional malls has slowed dramatically for the time being, and many malls and shopping centers are being revamped to include condos, rental apartments or office space. Mixed-use developments will become more common, predicts Robert S. Taubman, chairman, president and CEO of Taubman Centers (Bloomfield Hills, Mich.), largely because rising land prices and construction costs encourage greater density.

"We'll continue to build traditional malls," he says, "but some existing retail centers, which are already the commercial hubs of their neighborhoods, will be 'densified' and turned into mixeduse developments with residential, office or even hotel components."

John Bucksbaum, president and CEO of General Growth Properties (Chicago), says that the lifestyle center is an effective way to satisfy a variety of retailers, since some tenants prefer the indoor atmosphere of a traditional mall and others want outward-facing retail that's oriented toward the street.

"The integration of interior and exterior retail in the same project is one of the most important recent innovations in shopping center development," he says. "Consolidation of the department store industry has given us the opportunity to buy back vacant stores and either convert them to big-box retail or create more outdoor space-in either case creating different environments within the existing center."

But even if mixed-use developments are generating enthusiasm these days, the rate of their growth is likely to slow in deference to the recent credit slump and economic correction, according to Michael Niemira, the ICSC's chief economist. He points out that U.S. retail growth had already begun to slow dramatically in 2005, and the growth of new floor space actually declined by 3.4% in 2007.

"Lifestyle centers were hot in the past several years," Niemira notes, "but now they're going through a transition due to the economy. Lots of the retailers that you'll find in lifestyle centers are discretionary-apparel stores and restaurants-and they could be hurt in a downturn. The broad theme of lifestyle centers, though, will continue to evolve, and such developments are likely to be an area of strength because they're usually smaller than a regional mall and not as difficult to get built, and they tend to fill in underutilized areas."

Mitchell Friedel, executive vice president of Robert K. Futterman & Associates, agrees that lifestyle centers are the retail communities of the future, but he cautions that in today's difficult climate it becomes more important than ever to choose the right tenants-since retail drives the success of the developments' other components.

Retail Quality Drives Residential $

"When you develop a lifestyle center, with residential and maybe office and hotel space, you're creating mini-cities," he explains. "Your retail component will be the driving force, and if you have the right retail mix you can command a higher rate for the residential part. The perfect example of such a development in an urban setting is the Time Warner Center in New York City, a vertical development where condos sold at a premium price because of the quality of the retail below it. If your retail is not successful, it will negatively impact the other components."

Of course, the impending demise of traditional retailing has long been heralded, but nobody who's involved in the industry seems very worried about it, long-term. Steven Lebovitz, president of CBL & Associates Properties (Chattanooga, Tenn.), admits that today's retailers have to "multichannel" themselves, selling both in their brick-and-mortar stores and via the Internet, but he adds that online sales still represent a small percentage of the whole.

"People are still social animals," he says, "and they like to get out. Retailing will continue to evolve, and there'll be more emphasis on creating spaces where people can gather: feeding areas, fireplaces, social parks. If you own a retail development, you have to constantly reinvest in it, renovate it, bring it up to date with new uses and new stores."