Retail’s Fortune Tied More to Politics Than the Economy

IRVINE, CA–There’s little in the tea leaves to suggest a downturn anytime soon. With a backdrop of a still-booming economic cycle, the beleaguered retail market has been doing “moderately well” in the words of Faris Lee president and CEO Rick Chichester. If there’s a drag on consumer confidence, it’s the talk of impeachment and the ever-looming national elections.

“Trade wars, the impeachment, and the 2020 election have had an impact on consumer confidence and investor enthusiasm,” he tells GlobeSt.com. “We probably hit a low in September in terms of both, and we’re certainly off our peak of March of 2018.”

Nevertheless, the economic cycle is “still very strong, largely because of the expectation or hope of positive movement between the US and China.” Growing in the middle of that relatively rosy picture is the wrangling going on inside the Beltway. While presidential elections always have their way with both the above-mentioned confidence and enthusiasm, there is—for the next few weeks at least—the growing noise surrounding impeachment. “The new question is what the impeachment inquiry will do to consumer confidence. That and the election could cause a lot of disruption in 2020.”

Chichester makes it clear that those sentiments aren’t an endorsement, but rather just the facts of market dynamics. “If the impeachment inquiry goes away, confidence will go up,” he says. “If it gets deeper, it will go down.”

Politics could put a drag on what is otherwise a still-strong economic cycle, and Chichester points to the jobs picture as ongoing proof. Given the length of the run-up, “we’re in uncharted territory,” he says. Nevertheless, “look at the weekly jobless claims, which are probably more of a leading indicator than the monthly employment numbers. They’re at historic lows.” At the time of this interview Chichester pointed to weekly numbers hovering around 211,000. The week before they were at 218,000. “Compare that to the financial crisis, when we were north of 650,000. Those indicators suggest the economy will keep moving along well.”

If there are any economic warning bells, they can be heard in the stock market, when stripped of the Top 10 performers (the Apples and Microsofts, etc.), “There’s been a moderate decline,” he says, “especially when adjusted to gold, by 10.5 percent. So there are underlying issues.”

“Add to that the unknown of what’s happening with the Fed, and this idea of continually lower rates,” he says. “We’re so committed to solving for short-term economic needs as opposed to long-term, and I think it’s actually this low interest-rate environment that’s causing the bifurcation in the economy. Those who have great credit and lots of capital are getting money for almost nothing, and those who actually need to acquire debt don’t qualify. That creates a major divide that we have to come to grips with.” Even folding in that focus-driven bifurcation, Chichester doesn’t see “the economy showing any kind of recession.”

Sharpening the focus to commercial real estate, the news is as good as it’s ever been, and the Faris Lee chief executive points to such movement as CalSTRS hiking its real estate allocations to an impressive 15 percent. “It tells you money is looking at real estate in a favorable fashion as an alternative.”

However, that’s not necessarily retail real estate, which continues to show battle scars. “We’ve had more store closings in the first half of this year than in all of 2018. But retail sales still increased 3.3% year-over-year.”

But retail sales and real estate performance are two different animals. As much as “omnichannel” and “experience” have become watchwords at ICSC conferences, that can all get knocked into a cocked hat as a yet another generation—Gen Z—starts stretching its consumer legs. “They’re expected to spend $143 billion in 2020, which would equate to 40% of the US consumption,” Chichester explains. “And they consume differently as this is the first generation to grow up on the internet and with mobile devices. So consumerism is changing. While retail grew over 300 percent between 2000 and 2018, department-store sales have dropped almost 50 percent.”

Two things become clear: First, “brick-and-mortar is not going away,” says Chichester, especially when one considers that in any MSA, “retail generally occupies the best real estate in its local market. Those retailers that get it, that understand the changing dynamics of the market and can create a ubiquitous experience, will begin to expand more successfully and those that don’t will close more quickly. Where in the past, retail was ‘location, location, location,’ now it’s probably better defined as ‘location, experience, analytics.’”

Second, while “the physical aspects of retailing aren’t going away,” he believes. “They are going to change, the losers giving in to such adaptive reuses as same-day distribution.”

And the changing nature of that dynamic further clouds his predictions for 2020: “I don’t have as good a forecast for this year. Retail as an investment category will be highly challenged in 2020. Investors still have a lot of questions about its health and stability. So pricing won’t change a lot.”

In all, “I’m a substantial advocate for retail because it drives 70% of our economy,” he says. “The economy is still moving forward and foundationally there aren’t a lot of concerns about a recession. But then there are the unknowns of politics. For the coming year retail investments won’t be for the faint of heart, but there should be many excellent opportunities.”