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Slowing Economy Nibbles Away at Retail Fundamentals

There is bad news in the retail sector's troika of indicators: development, rents and occupancy.

By Erika Morphy | Updated on August 07, 2008

There are two economic storms brewing in the US now – one on Wall Street and one on Main Street. The retail real estate sector sits squarely in the middle of both — a fact that was illustrated earlier this month when Starbucks announced it was closing 500 stores by mid-2009. But Starbucks is hardly the only retailer to confront slowing sales with a cutback in real estate. Build-A-Bear Workshop will dramatically cut back on store openings next year, it announced this month, it announced this month, as will Regis Corp., the parent of Supercuts and other salon chains, which plans to close about 160 stores, most of them in malls to name just a few examples.

While all the commercial real estate sectors are suffering from the capital market freeze, retail developers must also contend with occupancy and rent projections that are looking more and more grim. “Right now retail is in the crosshairs of two trends: a slowdown in leasing due to slow retail sales, and a capital market that is reluctant to lend,” says Ray Cirz, CEO and managing director of Integra Realty Resources. He points to an iconic lifestyle center on the eastern seaboard that has been reluctant to issue a date for a grand opening. “Construction is complete and they have signed a number of major anchors but they are having trouble filling the inline space,” he tells GlobeSt.com. “Leasing has been that slow.”

It hasn’t helped that retail is heavily dependent at all levels for debt financing to get these projects off the ground, David Jacobstein, senior advisor at Deloitte’s real estate practice, and former president of Developers Diversified, tells GlobeSt.com. “Now, where there is debt financing available it is at much tougher underwriting standards – LTVs have gone to 60 to 65% down from 80%.”

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