Thursday, June 11, 2009

RREEF's retail outlook is too dismal

RREEF yesterday published a dismal view of the outlook for retail real estate. “Done Shopping: Structural Shifts in the US Retail Sector” concludes that the retail sector is going through profound structural changes that will result in lower rates of growth in retail spending in the future, which will translate into fewer stores and more failed retail centers: up to 10% of shopping centers may be forced to close.

Whilst the cyclical impact of the recession is causing pain throughout the sector, with store and mall closures in abundance, the report identifies longer term structural changes that will have a lasting effect, causing retail spending to grow at only half the rate that it achieved over the previous cycle.

RREEF’s main argument is that consumer spending in recent years was boosted by the housing boom and stock market rally, and without these factors spending will expand at only half the rate. The problem is that the data doesn’t show any evidence of such a boost:
real retail spending including motor vehicles actually grew at about the same rate during the housing bubble as during the preceding four decades”.
I guess what RREEF is implying is that retail growth over 2002-2008 should have been below the historic trend rate, but the housing and stock market booms kept the growth rate artificially inflated. So when the recovery occurs without these factors, retail spending will reset at a lower rate.

The report claims that the key structural changes that will impact retail sales growth are demographic. As the baby-boomer generation moves into retirement, boomers will cut back on retail spending. Census data shows retiree age groups tend to spend less than pre-retirees. That may be true historically, but this is the baby boomers we’re talking about. They are wealthier than previous generations of retirees; many will be retiring with generous pension plans, mortgages paid off, kids left home, medical plans in place and plenty of leisure time. I’ve heard a lot of talk about the great opportunities that will be provided by the huge baby boomer retirement market. I don’t buy the RREEF line that
“as they age, baby boomers will have decreased needs for retail goods and will be conserving more cash as they retire.”
I think they’re more likely to take their spending habits with them into retirement.

RREEF also concludes that that population growth will be regionally focused and will be biased towards ethnic groups, and these ethnic groups tend to live in different locations and have different shopping habits. This is certainly an ongoing trend, but this is nothing new and nothing that retailers and retail real estate owners aren’t already fully aware of. And at the macro level, unless this trend has a negative impact on household income growth, I don’t see it impacting retail spending growth.

Overall, I disagree with RREEF’s pessimistic view. The data shows that retail growth didn't accellerate during the housing boom, and there's no evidence that structural changes will have a negative impact on retail spending. I don’t see any significant reasons why the retail sector won’t bounce back strongly when the economy recovers. Innovation will fuel economic growth once more, household incomes will grow again and retail spending will too. New retailers will emerge to challenge the existing chains and retailing – and retail real estate – will continue to change, adapt and grow.

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