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CRE Finance World, Summer 2014

America, John Glass, a restaurant industry analyst at Morgan Stanley is quoted as saying that “Foot traffic at midtier, casual dining properties like Red Lobster and Olive Garden has dropped in every quarter but one since 2005”. Red Lobster and Olive Garden are at a middle class price point. In contrast, Capital Grille, a higher end Darden restaurant, experienced an average five percent annual sales increase over the past three years11. Darden Restaurants recently announced plans to separate Red Lobster’s 705 locations from the rest of its portfolio with the possibility that it could be sold off12. Wal-Mart, the largest US retailer has experienced four straight quarters of negative comparable store sales13. Wal-Mart serves a wide swath of the American market ranging primarily from middle income to lower income. Some middle income consumers are shopping at dollar stores and other discount retailers. This does not mean that all middle-income retailers are suffering. Macy’s has focused on local consumer needs and on utilizing its large stores for e-commerce fulfillment. Macy’s sales were up 3.6% during the holiday shopping season compared to the same time the previous year. Macy’s also has a diversified appeal as its Bloomingdales stores are geared to upper income consumers. Upscale retailers such as Tiffany and Michael Kors are doing well. Tiffany stores have the second highest retail sales per square foot for mall tenants at $3,017/SF, while Michael Kors stores have the fifth highest retail sales per square foot at $1,431/SF14. Michael Kors Holdings Ltd. (KORS) stock price increased 75% in one year (ending 3.12.14). The divergent fortunes of luxury retailers, middle income, and lower bracket retailers come in to sharp contrast when viewed over the five year period ending March 11, 2014. During that time period the DJIA Index and the S&P 500 Index rose 126% and 147% respectively. The Tiffany (TIF) and Nordstrom15 (JWN) stock prices grew 362% and 303% respectively during the five year period. This contrasts to the performance of Sears Holdings (SHLD) of +17%, JC Penney JCP -47%, Kohls (KSS) +44%, and Walmart (WMT) +52% during the same time period. As many middle income Americans traded down, Dollar Stores, stock prices increased. Over the five year period16 Dollar General CRE Finance World Summer 2014 30 (DG), Family Dollar (FDO), and Dollar Tree (DLTR) stock prices were up 161%, 98%, and 296% respectively17. The bifurcation of US retail between the “haves” and the “have nots” comes in to especially sharp contrast when considering that Tiffany and Nordstrom’s stock growth came during a period when median household income declined 2.1% (2009-2012 real dollars). Retailers that serve middle income shoppers have experienced declining sales, store closures, and falling or relatively underperforming stock prices. It is specifically the aforementioned merchants that typically lease space in weaker non-dominant Class B and C malls. II — Too Much Class B and C Retail “I don’t think we’re overbuilt, I think we’re under-demolished”, said Daniel Hurwitz, president and CEO of DDR Corp., a Cleveland-based REIT, during ICSC’s recent Western States conference in San Diego18. This is a reference to the oversupply of class B and C malls. The concern is that quite a bit of that underdemolished product found its way in to CMBS. Many of the malls that liquidated with high severities may be considered to be in the underdemolished category. At 23.8 square feet per person, The United States has more retail square feet per person than any other nation19. It was not always this way. In 1986 GLA per capita in the United States was 14.7 increasing to 20.2 in 200320. The increase was fueled by the addition of new malls, outlet centers, and other retail formats including power centers with very large “big box” tenants. In October 2012, Green Street Advisors forecast that 10% of the nation’s 1,000 enclosed malls would fail by 2022, eventually converting to uses other than retail. CoStar Group data maintained that there are more than 200 malls and large U.S. shopping centers with 250,000 rentable square feet or higher that are impacted by vacancy rates of 35% or higher. Fully 86.5% of those retail facilities were built before 2000. “Of these distressed regional mall, power center and community center properties, 43.5% were built in the 1970s and ‘80s, another one-quarter were built in the 1990s, and 17.5% were Challenges Confronting US Retail Properties “Older less desirable class B and C malls...are particularly vulnerable to the impact of declining household incomes and income inequality as they have been catering to middle and lower income Americans.”


CRE Finance World, Summer 2014
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