Thursday, July 31, 2008

Commercial Building Has All But Stopped.

I continue to be fascinated by the Commercial Real Estate (CRE) market, my interest fueled by the aggregate website, KeyPoint Partners.

They provide some very revealing statistics in the article, Retail Construction Hits a Red Light. (Retail Traffic).

" is coming to a screeching halt at projects across the country as developers reevaluate proposed centers' economic viability."

"...developers delivered 6.3 million square feet of space in those sectors (neighborhood and community shopping centers) during the second quarter--two-thirds of the planned 9.7 million square feet of space that was supposed to come online. “That, to me, signals that some of the projects are being either taken away or delayed,” says Abigail Marks, economist at CBRE/Torto Wheaton."

"However, Marks forecasts the full impact of the current downturn won’t be realized until next year, when only 14.7 million square feet of new neighborhood and community center space is projected to come on-line. In the first half of this year, developers in the U.S. began construction on 71 million square feet of retail space, according to CoStar Group, Inc., a Bethesda, Md.-based commercial real estate information provider. That figure represents a 24.5 percent decrease compared to the first half of 2007, when construction was started on 94 million square feet of new projects.

"With the conditions in the retail sector deteriorating precipitously, real estate developers are abandoning projects that appeared to be sure bets a year or two ago. As retailers pull back, many developers have opted to forgo construction of centers that have gone so far as breaking ground."

"One reason there hasn't been an even steeper decline in completions this year, says Continental's CEO David Kass, is that most of the financing for retail projects scheduled for delivery this year was completed years ago."

First, I've been saying for some time that I thought if a shopping mall hasn't already broken ground, it probably won't be built. This article is saying that even some projects that have already started are being stopped.

Secondly, there is obviously a two year gap between the original downturn, (first half of 2007), and the full implementation of cancellations and delays (first half of 2009).

Third, that unlike housing permits, which after all depend on millions of individual choices, the construction industry has come to an almost complete stop. As I read it, a drop from 94 million sq. ft. in early 2007, to 14.7 million sq. ft. in early 2009; let's say, a 80% drop.

An 80% drop in building.

So, in another six months or so, almost all construction will cease, except those projects already being constructed.

And left unsaid, is how long this moratorium is likely to last. Does it mean that even green lite projects won't come online for another couple of years?

In another article, (Plain Vanilla Shell) there is a surprising exception. Circuit City, which once was on the verge of being bought by Blockbuster and which has been having troubles. ("Sales fell more than 11 percent in the first quarter of this year, resulting in a net loss of $164.8 million.")

Nevertheless, they are steaming forward with more store expansions:

"... 45 to 55 new stores opening across the country over the next year, Circuit City Stores, Inc. said. The move is raising eyebrows among industry analysts, who caution that expansion might not cut losses.

"Circuit City is pinning its future on turning around its retail options," said Alexandra Biesada, a retail expert at Hoover's, a corporate analysis company."

I think I know what they're doing here. They're rolling the dice with someone else's money. Obviously, they got the go ahead for these new stores in the past, and it's firm enough to start building. (The article mentions it's doubts they'll get any further credit...)

This is what I call in retail store terms, Tom Petersoning It. A retail store who is having financial difficulties but who still has good terms and credits with their suppliers, orders more material than they can really afford in hopes that they can raise cash.

Of course, the problem is, it's usually just more of the same product that already isn't selling. If it was as easy as ordering product that would sell better, they'd have already done it. It's a desperation move.

Another trick would be to contract for way more advertising than you can realistically afford, in hopes that it will somehow spark business. Until they take that toy away from you.

Neither option is ethical; done with foresight, it might even be fraud. But I'm actually surprised more retailers don't try it. I think by the time stores get to this point, they are so discouraged they just kind of give up.

I figure Circuit City thinks it's going to go bankrupt anyway, and they might as well try building some "new" models.

The CRE market, overall, seems much more responsive to economic conditions. Or so I would believe, if I hadn't just watched them go on a building spree. Or perhaps, it's just that they are bowing to the reality of a credit squeeze.

If my theory that mass market stores were depending on new stores to continue their little ponzi schemes, we're in for some interesting times.

1 comment:

Duncan McGeary said...

Two things going on that I think are asinine.

First, the adjustments that show that the economy slowed in the last quarter of last year, instead of the first quarter of this year.

I'd say even sooner, even back to August, (at the same time as the credit crisis hit, my sales went backward) but at least they're getting closer.

Secondly, the idea that this isn't a recession or that we won't fall into a recession.

Bullshit, bullshit, bullshit.

On the street it is and has been a recession.