Retailers Can Succeed In A Recession

Creative strategies can help companies adjust to changing economic climate

Jack Gallagher, Associate Vice President, NAI NBS

Retail is one of the more visible segments of the commercial real estate market. And since the nation entered an economic downturn in late 2007, the focus on retail has even increased.

Today it’s difficult to read the newspaper or watch the news without hearing about another store or restaurant closing, or how much consumer spending has decreased.

The retail market is struggling in the current economic environment. Yet retailers are adapting to this more challenging landscape, and those who are surviving (and thriving) can benefit from the disposition of properties. Though this downturn hasn’t run its course, industry experts are optimistically anticipating a turnaround hopefully near the end of 2009 or the start of 2010.

Retailers have to change their game plans in order to stay afloat, because consumers’ expendable income and credit is diminishing. January chain store sales fell 1.6 percent from the previous year, according to the International Council of Shopping Centers (ICSC), and Wal-Mart was one of the only stores that had respectable sales numbers. As consumers deal with pay freezes, job losses, and diminished retirement accounts, retailers across the board are competing for their dollars by discounting merchandise, from clothing to furniture to groceries. Though this can help move product, it can definitely impact profits.

Some retailers are cutting back the hours they’re open to save on labor and utility costs. Mall operators in New England, for instance, have reduced their hours of operation, closing malls earlier or opening them later. Other retailers have chosen to lay off workers.

Retailers are definitely focusing on customer service in these challenging times. With fewer dollars circulating and consumers becoming choosier, retailers are going above and beyond to attract consumers with the highest level of service.

Retailers of all types have closed stores during this downturn, and ICSC predicts that more than 100,000 stores across the country could close in 2009. Pier 1, for instance, recently announced that it would close up to 125 of its stores, and Home Depot is shuttering 34 of its large EXPO Design Center stores. Retailers like Circuit City, Linens ’n Things and Mervyns have been forced to file bankruptcy.

But the ICSC also indicated that about 50,000 stores will open, and some of these openings could come when retailers secure new locations during the disposition of properties. For instance, Circuit City had stores ranging in size from about 20,000 square feet up to nearly 85,000 square feet, including four locations in the Portland-metro area. That presents valuable opportunities for other retailers.

Here’s one example: Mervyns filed for bankruptcy and closed all of its stores at the end of 2008. The department store Kohl’s and the clothing retailer Forever 21 joined together to bid at a bankruptcy auction and take over the leases on 46 former Mervyns stores in the western United States. Kohl’s will take about 30 of the stores and Forever 21 will take the remainder, at a total cost of $6.25 million – a very attractive deal.

These big-box stores seem to have large chunks of vacant space that would be suitable for a variety of uses, such as hard goods or soft goods retailers or supermarkets. And real estate professionals are getting creative with this type of space. Traditional retailers could certainly fill it, but the space could be used by nonprofit stores, medical uses or call centers. The square footage could also be subdivided to accommodate a few different mid-size retailers.

Because of the economic uncertainty and the plentiful existing retail space available, new retail development has largely been stalled, with few projects moving forward at this point. That’s why, in some cases, retailers are opting to renovate their stores in order to stay competitive.

The Fred Meyer store on Southeast Hawthorne Boulevard, for instance, is undergoing a renovation aiming for Leadership in Energy and Environmental Design (LEED) silver certification. Improvements include exterior wall insulation to limit energy loss, water-saving fixtures and higher efficiency ventilation and refrigeration systems. These changes will cost the company about $3 million more than a normal renovation, but the company says it’s worth it because it will result in considerable savings on future utility expenses.

New construction will pick up eventually, and when it does, LEED certification will be increasingly popular, especially in Portland. Mixed-use centers are also continuing to gain popularity.

No one can predict when this recession will end, but the retail industry is doing its best to remain optimistic. The chief ICSC economist predicts limited recovery in the second half of this year, with sales improving in 2010. Until then, retailers, landlords, and real estate professionals are working closely together to be creative and weather the storm.