The End of our “Mall-Centric” World?

I commend to your attention a brilliant essay, “Ghost Malls,” by James Quinn in The Prudent Bear on the dismal future of retail development in the United States. I then invite you to ponder the implications for (a) commercial development in Virginia, (b) the public fisc, and (c) human development patterns.

Permit me summarize the key points.

Retail developers have built thousands of malls and shopping centers around the country predicated on the assumption that consumer spending would continue on the same trajectory as seen over the past two decades. In light of the vast liquidation of wealth in the housing sector and the stock market — a sum measured in the multiple trillions of dollars — American consumers have been shocked to their senses. They are retrenching, restoring their collective savings rate from about zero to a figure that could approach eight percent of income, the level that prevailed before the great credit bubble commenced.

“No amount of fiscal stimulation will reverse this trauma,” Quinn writes. “Consumer spending has accounted for 72% of GDP. It will revert to at least the long term mean of 65%.” That’s a shift of massive proportions, and the impact on the retail economy cannot be overstated. While some economists think that consumer spending eventually will rebound as consumers satiate “pent up demand,” Quinn is not so sure. “Americans have bought everything they’ve desired for the last 20 years. There is no pent-up demand if you own 20 pairs of jeans and 60 pairs of shoes. The over-spending and over-leverage will take a decade to unwind.”

I agree with Quinn, and I would add to his argument. Consumer spending is dominated in the United States by the Baby Boomer generation. Not only do Boomers have to pay down debt, they are awakening to the fact that retirement is fast approaching. And while a majority of Boomers have resigned themselves to working a few years longer than anticipated in order to fund their retirement, they also know they have to build up their savings. Accordingly, I would not be surprised to see the national savings rate shoot past 8 percent — perhaps into the 10- to 12-percent range.

So, what are the consequences for developers of retail property? Major retail chains are already dropping like flies — Circuit City, Linens N Things, Bombay Company, Sharper Image, Foot Locker and Pacific Sunwear, just to to mention the bigger ones. Other retailers are scaling back expansion plans. Quinn expects to see 15 percent of the nation’s retail base disappear by 2011, and for vacancy rates in new malls to shoot up to 25 percent.

The next dominoes to fall will be the commercial real estate developers who speculated that consumer spending would increase without end. Writes Quinn:

Most of the retailers that are closing, lease their locations from mall developers. Many of these developers borrowed heavily to finance massive mall expansion. The term of these loans were generally five to seven years. The Wall Street wiz kids and their collateralized debt obligation (CDO) machine generated the vast preponderance of such financing in the last five years. According to commercial real estate expert Andy Miller, the collapse will come more rapidly than the residential collapse.

Billions in debt needs to be refinanced in the next two years and there is no one willing to make those loans, Quinn continues. As night follows day, we will see spectacular developer bankruptcies, and we’ll see regional banks take huge hits on their original loans. I would add one point: While all retail developers will suffer, those who have built in fast-growth counties on the metropolitan fringe in the expectation of population growth that may never materialize, will be hit the first and the hardest.

Concludes Quinn: “As Americans realize that they don’t “need” a $5 Starbucks latte, IKEA knickknacks, Jimmy Cho shoes, Rolex watches, granite counters and stainless steel appliances, our mall-centric world will end.”

I don’t know if our mall-centric world will “end” but I do believe the United States is transitioning into a very different economy. What applies to the U.S. as a whole certainly applies to Virginia. The painful restructuring of the economy will send tidal waves ripping through state and local tax revenues. Former fast-growth counties will find themselves particularly hard hit. To avoid being inundated by the waves, Virginians need to re-examine all the old assumptions — from population growth and tax revenues to the need for and location of new road capacity and other infrastructure. Failure to re-think fundamental assumptions will only compound the inevitable misery.


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28 responses to “The End of our “Mall-Centric” World?”

  1. E M Risse Avatar

    Jim:

    Great post and right on.

    If you are looking for trends here is one: Expand and refine the whole white elephant, yard sale, thrift store, consignment shop, “trash to treasures” (and the Fauquier County Land Fill) process.

    Millions of folks have billions of possessions they do not need. Millions of other folks NEED things …

    Joel Garreau had a fluf piece recently on converting defunct malls to Balanced (he did not use that word but then he misses a lot of works) components of human settlement patterns.

    It is not just “malls” that are in trouble. There are several new “Big Box Centers / Power Centers” and upscale strip centers that are under construction and will never open.

    One in Greater Warrenton — Fauquier would be a great new “hill town” Alpha Neighborhood.

    Keep up the good work.

    EMR

  2. Anonymous Avatar

    Umm,
    Maybe. Maybe not.
    I’d be reluctant to start putting percentages on shopping GDP drops. It (a) assumes that this current economic fiasco is truly a tipping point and/or (b) that any recovery will be sluggish and modest and take a very long time.
    Fact is, we don’t know. Although many economists believe that the recovery will not happen until into 2010, there are some out there who believe that it could be sharp and steep — meaning a “U” shaped curve. Mind you I can’t subscribe to this since I am at a loss to explain much these days. But keep in mind that unlike the previous four recessions, this one was led by financial services and not by consumer spending or energy or some other sector. Therefore, a lot of it wasn’t as “real” as a decline in real things. Since much of it was illusory anyway, debt can be dealt with. But debt can’t be erased or otherwise taken away as long as the mechanism doesn’t exist to value that debt and somehow sell or or dispose of it. This is exactly what happened with the Resolution Trust COrp some years back. It not only disposed of bad debt but actually turned a profit doing so. Unfortunately Timothy Geithner’s and Barack Obama’s rescue plans really fell short of the mark this week. Hopefully they’ll get their act together soon.
    Anyway, when it comes to predictions, don’t forget all those “tipping points” everyone was talking about when gasoline reached more than $4/gallon. We were all predicting a major change in human settlement patterns. Even though the dearth of real estate credit is serving the ame purpose, we might end up eatingour words on this one, Boomers or no Boomers.

    Peter Galuszka

  3. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    2015. That’s when we might see recovery. Most of America is just not seeing how bad things are going to get.

  4. Anonymous Avatar

    In the community I live in we recently lost Linens N Things and will be losing the Circuit City store. Both were located side by side in a brand new shopping center that was built in 2007.

    The shopping center is now basically 1/2 empty and I have no idea who/what will eventually occupy that space. My gut tells me it could be empty for a very LONG time…I could see a Best Buy moving into the old Circuit City space but who knows.

    Also, Circuit City had leased it’s old space across the street from the new store to a group of local entrepreneurs who invested several million dollars into a family fun type place and they were forced to close because it was sublet from Circuit City. I have no idea how they will ever recover.

    Our indoor mall which is about 30 years old is pathetic….I have no idea how many of the businesses stay open based on what they sell….I mean you have to ask, who needs 1/2 of the crap most of them are selling?

    It seems that in the process of trying to make communities more balanced by building MORE shopping malls, plazas, etc. closer to people, the commercial real estate industry has overbuilt in a BIG BIG way.

  5. James Atticus Bowden Avatar
    James Atticus Bowden

    Jim: Thanks. Interesting observations which beg real, serious analysis.

    I’d like to pick the minds of economists to see what the real macro picture looks like 10 years and beyond.

    FYI: I doing step by step tutorial of ‘futures’ methodology on my web site – Deo Vindice.

  6. ok to keep some perspective here…

    …the two retail companies that actually made a profit last year?

    You guessed it.

    McDonalds and WalMart.

    what does that mean?

    Are they the Canadian Geese of the retail sector?

  7. Anonymous Avatar

    If the savings rte goes up, that money will have to be invested SOMEWHERE.

    Government spending was preveiously around 30% of the economy. If consumer spending retrenches, then govenment spending will become a larger piece of the pie.

    Republicans will point to this as if it was a Dem conspiracy to increase socialism.

    Whateve malls and big box centers are left will be sufficient to meet the demand, so we may lose 7 to 10% of our mall accupants. More likely, the rents will go down, and they will be mostly filled, but at lower rates.

    Lower rates will mean loawer prices and more competition.

    Don;t hold your breath for the end of the world.

    RH

  8. Anonymous Avatar

    “2015. That’s when we might see recovery. Most of America is just not seeing how bad things are going to get.”

    I’m predicting Dow over 10,000 this year.

    RH

  9. When it comes to malls – we had some stuff going on that had nothing to do with the national/state economy and everything to do with local economies and that would be one locality upping the sales tax ante by engaging in essentially a mall/commercial development arms war.

    We see this in the Fredericksburg Area – and it basically creates abandoned shopping centers as new ones are built in an adjacent jurisdiction and the retailers jump ship to go to where the action is.

    Besides the Mall – as a concept is now morphing into what are being called Lifestyle Centers and existing Malls are undergoing makeovers to be converted.

    I don’t disagree that things are tough.. but we had too “many” of various things anyhow and it was inevitable that places like Circuit City were going to go bust.

    And what the hey.. who would have thought that a business model for stores that sold only bath stuff was viable anyhow?

    Yes, Starbucks is closing a lot of stores.. isn’t it getting pretty ridiculous when you’re standing in front of one Starbucks and you can see another one across the street?

    What kind of business model is that?

    Think of it this way – Our economy is getting a way-overdue tummy tuck.

    When I see tent cities going up outside of NoVa.. I’ll say mea culpa.

  10. OOPs! This just in from the esteemed RTD:

    “No bust for retail boom”

    ….

    “”We have an awful lot of retail, with fewer retailers,” he said.

    But, he said, there is not much developers can do because the process was already in the works before the economy tanked.

    Given that, the centers will open with some space not leased.”

    http://www.timesdispatch.com/rtd/business/real_estate/article/RETL15_20090213-213709/206345/

    huh?

    sounds like the new stuff is going to cannibalize (and then some if combined with consolidations) older stuff.

    I have to say… nothing (other than an outright slum) is more depressing than an older shopping center “re-purposed” as a bunch of tanning spas, pawn shops and check-cashing services, etc.

    Localities don’t seem to know what to do with shopping centers when they get old and ugly…. because instead of telling developers to redevelop.. they give them new rezones… that will assure the essential abandonment of existing commercial.

  11. Remember when Richmond was feeling sorry for itself for having lost the banks to Charlotte?

    read on….

    “The financial collapse has hit the city known as Wall Street South.
    For years, Bank of America Corp. and Wachovia Corp. helped turn Charlotte into a financial powerhouse. Now, the big banks have thrust it into the same predicament as the real Wall Street–the city is losing thousands of jobs and an unquantifiable amount of prestige. Residents who invested heavily in the banks have seen their wealth dissipate and lifestyles change radically.

    “It’s kind of sad, disheartening because the banks have been the backbone of Charlotte for so long,”
    The loss of so many bank jobs is causing upheaval in other industries. Consumers who have been laid off or fear being out of work are curtailing their spending, forcing restaurants and retailers to close–among them Morton’s, a high-end steakhouse, and a 15-month-old Home Depot Design Center. Even some of the Charlotte’s lively night clubs have shuttered their doors.

    “There’s a bit of a state of disbelief,” said Bob Morgan, president of the Charlotte Chamber of Commerce. “We are seeing things happen that no one else has contemplated before.”

    Charlotte remains the nation’s second-biggest bank town by assets–second to New York, and in front of San Francisco. But, Morgan said, “we don’t know what the city is going to look like once we emerge.”

    http://fredericksburg.com//News/FLS/2009/022009/02152009/445807

    Question: Did Richmond miss opportunity ..or dodge a bullet?

  12. Anonymous Avatar

    “Localities don’t seem to know what to do with shopping centers when they get old and ugly…. because instead of telling developers to redevelop.. they give them new rezones… that will assure the essential abandonment of existing commercial.”

    We had a grocery store move from one location down the road about 2 miles to a brand new location “outside” of town….they were “following rooftops” and wanted to be closer to all the new development.

    Anyway, they kept the lease on the old place for like two years so no new competition would move in….now the old place, which is less than 20 years old, is deserted and the place looks pathetic.

    Crazy.

  13. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    Worried about the economy, Joe has started putting away more money into his personal savings account. His wife Jane sees no reason to save and continues to run up her personal credit cards. What is the net saving as a percentage of household income for this couple?

    Since 1945, America has NEVER had a net negative national saving rate compared to gross national income. Until 2008, when the nation was burning through 700 billion of borrowed money a quarter.

    Joe Six Pack can save all the money he wants, but when Jane is piling up obligations 7 times over, it is only a matter of time before Joe gets divorced or lands up in BK court.

    The nation has no such recourse, therefore it’s only a matter of time before the foreign loan sharks send in muscle to collect the debt. On Tuesday, America gets a brand new credit card, so everything will be alright. Right?

    New malls were funded by the Vegas method. Borrow money with a set date to pay back, and put it all on a sucker’s bet that recessions are a thing of the past.

    If they lower the footage lease rates, they default. If they can’t fill the space, they default. The older malls have flexibility the new ones don’t. Better to turn the new ones into one of EMR’s villages, with subsidized housing on the upper floors and necessities on the lower. Then Larry won’t have to worry about tent cities.

    10,000 Dow? Sure why not. Such stock rebounds happened during the depression. Didn’t change the fundamentals. Won’t this time either.

    “The legacy of high government debt is yet another reason why the current crisis could mean stunted U.S. growth for at least five to seven more years.”

    http://online.wsj.com/article/SB123362438683541945.html

  14. re: “..Better to turn the new ones into one of EMR’s villages, with subsidized housing on the upper floors and necessities on the lower.”

    Now, see, all this time I’ve been asking EMR how we should evolve to Fundamental Transformation and he’s chosen to dance a jig instead of answer… and you come up dead on in your first musing…

    shazzzzammmm

    so… convert old malls to mixed use redevelopment …everyone wins ..right?

    I mean the lady that fits your glasses at the Optometry store.. goes home to his flat upstairs at the end of the day and stops by the Kroger on the way to her flat.. right?

    EMR – where is your noodle, boy?

  15. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    “convert old malls to mixed use redevelopment …everyone wins ..right?”

    Not quite. Older malls aren’t sitting there with a lit fuse of debt. Their game is much like slum lords in that any cash flow is good. That’s why you see single owner establishments instead of chain stores. The new malls are under the gun to meet cost projections which limit their ability to reduce footage rates. Adding an affordable housing component would assist cash flow, with other incentives taking any of the forms used in current smart growth schemes. In any crisis there is opportunity. Here is the perfect chance to test the New Urbanist theory.

  16. Anonymous Avatar

    Jim,
    As Larry G has noted, the Richmond Times-Dispatch is trying to breathe new life into malls. On Sunday, it had a gushy piece about several new ones (alebit store shave been delayed). This morning it gushed about the old Regency Square.
    Are they raining on your parade or merely trying to snarf up some ad bucks?

    Peter Galuszka

  17. Anonymous Avatar

    “10,000 Dow? Sure why not. Such stock rebounds happened during the depression. Didn’t change the fundamentals. Won’t this time either.”

    The fundamentals are that the valuation of the Dow companies historically runs at 50% to 75% of GNP. At the most recent peak it was about 190% of GNP, which was clearly unsustainable.

    Now it is back down to around 75%.

    Fundamentally the market is related to what we produce and sell, what fundamentals did you have in mind? Are you predicting that GNP will fall 30%?

    RH

  18. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    I know about Buffet's rule of thumb. But I also know that the government is skewing the GNP and stock valuation numbers with their bailouts.

    The S&P500 PE was around 18.3 the last time I checked. Buy in is around 15, which means another 18 percent to go in normal times. Adding in government interference, disastrous earnings reports, and pending hyperinflation, the real buy number is even lower.

    GNP is a bogus statistic propped up by stealing from future generations. Take away the government meddling, 2008's 15 Trillion would have been 12. When you look at how much the Fed currently has committed to this crisis, 2009's GNP could have seen 7 Trillion. That's why the politicians had that deer look last year, why no one read Barry's Bill last week, and why tomorrow any pork is good pork.

    http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html

  19. Anonymous Avatar

    I didn’t know that buffet used my rule of thumb!

    GNP is bogus, I’ll agree. It counts waste as if it was production, for one thing.

    Government spending is usually figured as having a multiplier of 1.5, not as good as commercial spending, but since that is in the toilet……Government spending takes resources away from people that might (eventually) buy something, but government spending is directed and consumer spending is not.

    With your outlook, I hope you are buying short…

    If you don’t like that metric compare the trajectory of unemployment figures for the last 4recessions.

    If you don’t like that one check out the increase in bulk and containerized shipping, recently.

    The prime rate, inflation, jobless rate, and 30 yr mortgage are all lower today thanin 1980. To see a few other things thatare cheaper, see George Will’s Sunday column.

    Home sales are up in California, Florida, and Michigan. The Shanghai composite index is up 24% since August and the Brazilian market is also up. If coolies and rancheros can do it, surely America can.

    If we really see a GNP of seven, invest in guns and ammo.

    RH

  20. The first thing I'd suggest is that everybody stop using the Dow as a proxy for the stock market. It's too narrow of an index for these times. Citigroup and GM on the index? AIG was on the index until Sept. 22, 2008 (when it was replaced by Kraft Foods). IBM makes up a huge portion of the index. I think you should look at the S&P500.

    "Question: Did Richmond miss opportunity ..or dodge a bullet?". Yes, Richmond's failure is a secret success. I called a guy in Charlotte and told him that Richmonders were expressing a sad Schadenfreude over Charlotte's recent challenges. He asked me to pass on this poem to you:

    I hold it true, whate'er befall;
    I feel it, when I sorrow most;
    'Tis better to have loved and lost
    Than never to have loved at all.

    He also asked me to tell you that he thought Charlotte's NFL team would have a better record than Richmond's … oh yeah, never mind.

    Then he said that North Carolina's Research Triangle Park would get more patents and graduate more PhD's than Virginia's … oh yeah, never mind.

    All this talk about the obvious superiority of Virginia's "no industry in the state is our plan" plan was making him hungry so he went to make a peanut butter and jelly sandwich out of high quality Virginia made products … oh yeah, never mind.

    But, no worries, he decided to help the economy by going out and buying a new iPod at the local Circuit City … oh yeah, never mind.

    Shame. Shame. Shame on the RoVA rats who revel in the recession of those who have succeeded where the rats have only failed. Shame on trying to parlay incompetence in losing the banking sector into some kind of brilliance. Time for all of you to go back to Country Club of Virginia, order a few bottles of overpriced French wine (none of you would lower yourselves to drink the far superior California vintages) and talk about the good old days in Virginia. You know – the golden age that ended about 1820.

    Shame.

  21. My friend from Charlotte called back again. He said to tell LarryG this:

    “It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.”

  22. Jim Bacon Avatar

    Peter, I saw that piece in the T-D, which described the “revitalization” of Regency Mall, which is located near where I live. I won’t speculate about the T-D’s motives in writing the material, but I do believe the writer totally missed the boat.

    First, Henrico County has missed an incredible opportunity to use this new wave of investment to create more functional human settlement patterns in and around what is probably the second largest retail core in the county. Nothing about the area has changed — just the store fronts. No mixed use. No pedestrian-friendly streetscapes. No effort to create balance.

    Secondly, no one raised the issue whether this development was economically sustainable, or whether, given the macro-economic changes taking place in our society, a whole bunch of retailers and land owners are going to lose their shirts.

  23. Jim Bacon Avatar

    Come to think of it, Peter, I should have saved that T-D piece and written an EMR-styled post on how the daily newspapers perpetuate consumer ignorance in regards to human settlement patterns.

  24. Anonymous Avatar

    Groveton: Was that Winston Churchill?

    RH

  25. Anonymous Avatar

    You can see a grapfh of total stock market vs GNP at:

    http://blog.etalonfund.com/

    RH

  26. Anonymous Avatar

    Groveton – well stated.

    But I must confess I am still grateful for a job as a general counsel that I didn’t get. The company folded within six months of my interview.

    What would Virginia do were the President to request, and Congress agree to, a 15% reduction in government contracting to help pay for the so-called Stimulus Bill?

    I don’t think that the Governor and the General Assembly should be deciding what two or three industries we should cultivate beyond feeding at the federal trough, but it would be nice to have them discuss the need for the state to diversify and to talk about what conditions would help such industries to develop. And by that I mean more than help some land speculator cash in or some REIT with empty buildings rent them.

    Then I’d like to hear from some real people — not the crowd of usual suspects who believe that ordinary people exist just to pay more taxes or accept lower wages just to create wealth for the usual suspects.

    TMT

  27. Anonymous Avatar

    As a rule I’d say tht cultivating industries is a waste of time and money. Better to just create the best and most hospitable conditions you can, and let people compete to enjoy them.

    On the other hand, there are times when private capital cannot start a business on its own, because of a chicken and egg problem, or because the service needs time to grow the market. In such cased an argument can be made for some temporary government intervention and hand holding.

    Can anyone post an example of a businesss that used a government jump start to become successful?

    Maybe the early government “mail contracts” to jump start commercial aviation?

    RH

  28. “Circuit City, Linens N Things, Bombay Company, Sharper Image, Foot Locker and Pacific Sunwear, just to to mention the bigger ones.”

    Where did you get this list?
    Foot Locker and Pacific Sunwear are not going out of business.

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