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CRE Finance World, Summer 2014

Historically, peddlers brought merchandise to frontier Americans and mail order catalogues such as Montgomery Ward and Sears were the way generations of Americans received their goods. Milk and diapers were once delivered regularly. On a partial basis — the US may be re-entering previous shopping patterns with mobile devices and package delivery companies taking the place of peddlers, catalogues, milkmen, and diaper delivery services. Nevertheless, there will always be demand for high service retail in good locations. Conclusion The three macro factors confronting US retail real estate are the declining fortunes of the middle and lower income sector, the oversupply of US retail real estate, and the advent of e-commerce. These factors will continue to negatively impact class B and C malls and power centers. Should income dispersion trends continue or get amplified, retailers that serve middle income Americans will suffer. Malls as an asset class will continue; however, surviving and thriving may require an increased focus on experiential uses such as restaurants, entertainment and retailers that emphasize personal service. Commodity product demand will be channeled online. Many retailers will maintain a hybrid physical store/online presence with the net result being less demand for physical space. Discount retailers will continue to prosper; although, some of their demand will shift online as well. Class A malls in good locations with barriers to entry will continue to flourish. Warehouses supporting the logistical needs of e-commerce will benefit. Many prior conduit transactions overloaded with weak malls and strip centers will suffer, and CMBS investors will cast a wary eye on the quality and nature of retail facilities in new transactions. 1 Data as reported through 12.17.13 as reported in Wesley Flamer-Binion, Tad Philipp, and Robb Paltz, Moody’s Investors Service, December 17, 2013, Sector Comment: Troubled Mall Loans Weigh on US Conduit and Fusion Transaction Credit Quality. CRE Finance World Summer 2014 34 2 As of 1. 1. 2014 and based on six month moving average and on original loan balance. Source: Credit Suisse, Trepp 3 Source: Credit Suisse, Trepp 4 Source: Charts 6 and 7 are from “Income Inequality in the United States, 1913-1998” Emmanuel Saez with Thomas Piketty, Quarterly Journal of Economics, 118(1), 2003, 1-39 (Longer updated version published in A.B. Atkinson and T. Piketty eds., Oxford University Press, 2007) (Tables and Figures Updated to 2012 in Excel Format, September 2013). The series are based on income tax statistics. Full details on the construction of the series are provided in appendix of Piketty and Saez (2006), available online at: http://emlab.berkeley.edu/users/saez/pikettysaezOUP04US. pdf 5 5% and 95% were used because that was the way the Institute for New Economic Thinking analyzed the data in their report. Using 10% and 90% would likely result in a lower contrast, while using 1% and 99% would likely result in a higher contrast 6 Barry Z. Cynamon and Steven M. Fazzari, Inequality, the Great Recession, and Slow Recovery, January 23, 2014, Institute for New Economic Thinking 7 Q4 2013 Nov, Dec, Jan 8 Ben Fox Rubin, “Darden Restaurants Reports 18% Earnings Decline Weakness at Olive Garden, Red Lobster Continues to Hurt Restaurant Operator”, Wall Street Journal, March 21, 2014 9 IBID 10 Nelson Schwartz, “The Middle Class Is Steadily Eroding. Just Ask the Business World”, New York Times, February 2, 2014 11 IBID 12 Samantha Sharf, “Darden Plans Red Lobster Spinoff”, Forbes, December 19, 2013 13 Wal-Mart Stores, Inc. Comparable Store/Club Sales http://stock. walmart.com/financial-reporting/comparable-store-sales/ Fourteen weeks ending January 31, 2014, Thirteen weeks ending October 25, 2013, Thirteen weeks ending July 26, 2013, Thirteen weeks ending April 26, 2013 Challenges Confronting US Retail Properties “On a partial basis — the US may be re-entering previous shopping patterns with mobile devices and package delivery companies taking the place of peddlers, catalogues, milkmen, and diaper delivery services.”


CRE Finance World, Summer 2014
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