Retail store closures will peak in the first half of 2010, in addition to the 69 million square feet lost from retail bankruptcies and liquidations that began in 2008, according to CreditSights retail analyst James Goldstein.
Speaking last week at a CreditSights conference at the Sheraton New York Hotel and Towers, Goldstein also said the square footage in retail space lost to closures is the “equivalent of Macy’s shuttering half of its stores.”
He told attendees that “expectations for the holiday season have been set fairly low.” He cited one survey, from Ipsos/Reuters, conducted in the spring in which 73 percent of consumers said they’d cut back on luxury purchases and 66 percent would cut back on apparel.
He expects Nordstrom Inc. to be among the first of the luxury retailers to recover, noting the Seattle-based company had the best balance sheet going into the downturn. Luxury outlet concepts such as Saks’ Off 5th and Neiman’s Rack have seen more growth in store openings than their full-price nameplate cousins, the analyst added. Macy’s was pressured earlier in the year, but has since “stabilized,” although it will face fierce midtier competition from J.C. Penney Co. Inc. and Kohl’s Corp., he concluded.
Analyst Craig Guttenplan, who spoke on “How REITs Can Benefit from the Turmoil in Commercial Real Estate,” said, “The commercial real estate market is a ticking time bomb for anyone who bought with great leverage at the height of the market.”
Guttenplan noted that commercial property prices are already back to 2004 levels.
He said public REITs are in a better position to weather the storm than private real estate firms due largely to access to the public equity markets and existing long-term banking relationships. Moreover, many REITs are in a better financial position due to covenant requirements in existing finance agreements.
In addition, the firm’s two credit specialists believe speculation about the end of the recession may be overstated.
Chief strategist Louise Purtle, who spoke on “The X Factor Files: The Risk Is Out There,” warned that, while economic conditions are improving, numerous perils, including an equity or currency crisis, could be ahead.
With global economies remaining challenged, the idea the recession could have run its course between its December 2007 start and its presumed end during the second quarter of this year defies logic, she said.
Purtle noted the U.S. market has shifted to one now having an appetite for risk. However, while some economists believe the recession ended in the second quarter, she noted others who insist the recession cannot end until there’s improvement in the employment picture.
Speaking of the risk of an equity crisis down the road, Simon Ballard, head of European credit strategy, pointed out that earnings have been mostly about cost cutting. “Without the emergence of any underlying consumer growth, that’s not sustainable,” he concluded.
As for global currency risks and the potential impact on the U.S. dollar, Purtle said changes in hedging strategies will depend on whether there’s a “lack of comfort with some of the central banks’ monitoring policies.”
She noted that if there’s increased volatility or a double-dip recession, there will be more competitive moves by the central banks around the world to protect their own markets. That scenario will portend a greater risk toward a new reserve currency, she concluded.