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.

More 2007 Retail Sales Data

The chart below details the broad retail categories for which retail sales tax data is collected. It is worth noting that the data only reflects those goods and services that are liable for sales tax. Food and grocery sales and prescription medicines are two important examples of goods that do not incur sales tax.

• The largest retail sales category is motor vehicles, with sales of over $600 million across the county in 2007.


• Aside from Other retail stores, the next largest categories are General Merchandise stores (such as Macy's, Target etc) and Eating & Drinking Places.

Top Retail Cities in Marin

Continuing our look at the retail sales tax data for Marin County from the California Board of Equalization (great name by the way). The table below shows total sales at retail outlets by city for the years 2006-07. So what is it telling us?

• San Rafael captures the largest slice of retail sales, with $1.3 billion or 38% of sales in Marin in 2007. San Rafael extends over quite a large area, which includes the downtown area, Northgate Mall, the big box retail along 101, Montecito Plaza and Home Depot.
• Novato is the second largest city, with 18% of the total, or $595 million. Most of this is drawn through Vintage Oaks.
• Corte Madera, with sales of $450 million, or 14% of the total, takes third place.
• The city with the greatest increase in sales was San Anselmo, with growth of $9.9 million, or 14% between 2006 and 2007. I don't recall any major retail changes taking place, so I wonder if the change reflects the impact of the floods on New Years Day 2006, which took out many downtown businesses for several weeks.
• Mill Valley also had a good 2007, up $6.9 million or 3.7% in 2007, possibly as a result of new store openings at Strawberry Village.
• Corte Madera recorded the greatest fall in sales over the period, down $4.2 million or 0.9% in 2007. This may reflect refurbishment work at the Town Center (Barnes & Noble) and The Village, which went through a program of renovations in 2007.

The BoE data also provides details of sales by retailer category. Unfortunately, the Board is in the process of changing how it classifies businesses, so we can't do a meaningfull comparison with previous years. I'll publish some charts with this data later this week.

2007 Retail sales data released

The California Board of Equalization recently released retail sales tax data for the fourth quarter of 2007, showing that the recession was well underway by the end of 2007 with retail sales in the state declining by $1.2 billion from the fourth quarter 2006. This was the second consecutive quarterly drop. We will have to wait another year for the data for 2008 to be released, but we would expect to see steepening drops in each quarter.


Marin County fared better than the state as a whole, with sales up a marginal 0.1% for the quarter and 1.7% up for the year. This is the worst performance since 2002, when retail sales declined following the fallout from the tech crash. The chart below shows the quick turnaround that occurred in 2003 and 2004: as the Fed loosened the money supply people went on a mammoth shopping spree. It will be interesting to see whether a similar bounce back occurs as quickly this time.

Shopping in Marin – adding up the numbers.

I was curious to know how big the whole retail market is in Marin, or put another way, how much money is available to be spent in stores in the county. This is an important number for retailers and mall owners, because they all want (and need) to grab a slice of it. One way to estimate the market size is to find out how many dollars the average person spends in stores and multiply it by the population. Another way is to track recorded retail sales or multiply average store sales per square foot by the total retail space in the County.

One widely used source for retail spending estimates is the Census Bureau’s Consumer Expenditure Survey, which is produced every few years. I totaled up the retail expenditure items for the San Francisco metro area from the 2006 survey and it appears that average spending per household was $18,111.

As we all know, Marin folks have more cash to spend than the average San Franciscan. According to the Bureau of Economic Analysis, average per capita income in Marin in 2005 was 44% higher than San Francisco. If we assume retail spending was also 44% higher than San Francisco the average Marin household would have spent approx. $26,000 in 2006. Allowing for some additional growth over the last two years bumps this up to $27,600 per household in 2008. With just over 100,000 households in Marin, that adds up to around $2.8 billion this year.

Now let’s add it up the other way. In 2006 taxable sales in retail stores in Marin were just over $3.2 billion, according to the CA Board of Equalization, which monitors such things. Allowing for some market growth, the 2008 total is probably around $3.4 billion. But this total includes non-household sales (i.e. trade sales such as lumber, office supplies etc) and autos, boats etc (which I don’t count as retail). Take these items out and the total reduces to $2.1 billion. Then we have to add in an allowance for sales of goods and services which do not attract sales tax, such as food to take home and prescription drugs. These items account for approx. 25% of household retail spending. Adding them in pushes up total retail sales in the County to $2.8 billion. This just happens to match the amount I calculated above, which is nice.