By CAROL SCHILLNE
Mr. Toad’s Wild Ride might be an appropriate description for the retail market ahead of us. According to University of California, Los Angeles, Anderson School’s forecast presentation, we are to hang on until the year 2010.
Retail sales are expected to be dismal through the upcoming holiday season, and store closures and bankruptcies are on the rise. As consumers buy necessities, not niceties, core retailers such as Circuit City Stores Inc. are closing locations, while regional retailers like Shoe Pavilion Inc. are closing up shop. As winter approaches, the outlook seems bleak.
There are many factors that have led to the current market conditions,consumer panic, the housing crisis, media reports, stock market woes, a frozen credit market and the recent presidential election.
The projected store closings could give as much as 16 million square feet back to the California market alone.
Orange County has not been immune. More than 179,000 square feet of negative absorption was seen in retail space in the third quarter. Shop space vacancy also rose from 4.2% to 4.8% in the third quarter. Average asking lease rates, however, did rise slightly from $2.71 to $2.79 per square foot per month.
So since sabbaticals are not an accepted practice in our real estate industry, what do we do for the next 18 months? We focus on what is doing well.
There are still some active retail categories: drug stores, specialty-concept grocers, fast food, Irish pubs, new theater concepts (an escape from CNN), new fitness clubs and value retailers such as Costco Wholesale Corp., TJ Maxx, Ross Stores Inc., Wal-Mart Stores Inc., and 99-cent stores. Some smart companies are actually relishing the current market conditions, such as Wells Fargo & Co. and In-N-Out Burgers Inc., which are cash rich and have managed their expansion prudently.
As in any downturn, tenants needs to be creative and need to recognize trends. The majority of retailers will be adjusting to the market by specializing, “right sizing” store formats and by co-branding with brands owned by the same parent company or with complementary retail uses. Now is the time to focus on differentiation and value. This also is true for landlords.
This wild ride may not end quickly, but the road will straighten out in the years ahead.
Schillne is first vice president in the Anaheim office of CB Richard Ellis.
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