Throughout the year, recession-wary merchants have been going through their real-estate holdings like Santa parsing naughty and nice children, according to shopping mall developers. And having survived 2009 with less carnage than feared, retailers are expected to open stores next year carefully, but steadily.
A Shovel Shortage
Retailers tightened their belts faster and more dramatically than in past recessions -- including closing underperforming stores and disposing of real estate -- said developers meeting recently at the International Council of Shopping Centers' annual New York Conference and Deal Making session. Now, after a year-long drought in financing and new construction, developers see an increase in groundbreaking and dealmaking.
"There's not been a shovel in the ground anywhere in North America in the last 18 months," said Michael Kercheval, president and CEO of the ICSC.
Developers' fears of massive vacancies brought on by retailer bankruptcies such as Mervyn's, Circuit City and Linens & Things were overblown, Kercheval said. In many cases, other retailers such as Kohl's (KSS) and TJX Cos.' (TJX) Homegoods chain took advantage of those turnkey spaces to expand.
The year 2009 "was grim, but not as grim as they had predicted," said William Ackman, founder of hedge fund Pershing Square Capital Management, which owns stakes in Borders Group (BGP) and Sears Holdings (SHLD)
Uptick in Activity
Many retailers streamlined sharply during the recession, cutting debt and inventory so they could operate profitably with lower sales, and now are in a stronger position, said Ackman. He noted his company's analysis of filings with the Securities and Exchange Commission found most leading retailers plan to add stores next year.
And the capital markets are also becoming more favorable, as a number of troubled assets and bankruptcies are resolved, said the experts. After nearly a year when banks were backing away from financing mall developments, the last two months have seen a surge in activity, said Simon Ziff, president of The Ackerman-Ziff Real Estate Group LLC.
Ziff noted that he recently had interest from five lenders in a development that could not get financing a year earlier. He was able to put the financing in place quickly, in under 30 days, he said.
The developers are also counting on help from local governments in the form of incentives. Local communities have noticed the loss of tax revenues and other income generated by retail, so they are courting retail developers, said the ICSC's Kercheval.
A Shrinking Pie
But don't expect wholesale openings coast-to-coast, warn the developers. "The world will not return quickly to its pristine state," said Peter Sharpe, president and CEO of developer The Cadillac Fairview Corp.
Even as the economy improves, brick-and-mortar stores are fighting for shares of a shrinking pie, said retail analyst Gregory Melich, managing director of Morgan Stanley (MS). Savings rates are rising, so consumers are dedicating a smaller share of income to shopping. Plus, a larger portion of that smaller budget is going online, he said.
Online sales now make up 4% of retail sales and will grow to 6% in the near future. As a result, a big portion of the sales growth retailers will see as they come out of this recession won't be in brick-and-mortar stores, Melich said. Retail vacancies may not come down as quickly as in past recoveries, and the industry needs to think about how to repurpose millions of square feet of real estate, he said.
After overplaying their hand before the recession and having to cut back, retailers are focusing expansion plans on profits rather than size, said Sharpe. And new mall developments have taken a back seat to redeveloping existing malls. He noted that since department stores -- the traditional mall anchors -- aren't doing well, they're being replaced in some malls by supermarkets, health clubs and other retailers.
The Euro Invasion
In a way, this recovery will be similar to what happened in after the 2000-2001 recession, said Glenn Rufrano, CEO of Centro Properties Group (CEOPF). At the time, online sales were already becoming a factor, and department stores were beginnign to decline, he said. As a result, many developers demolished malls anchored by department stores and built new ones anchored by big-box stores and warehouse clubs.
So pretty soon, you may be dodging grocery carts in the parking lot as you load your bags of Swedish-design clothes into your car. That is, unless you stay home to shop online.