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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