The Persistent Sluggishness of Retail Development

Retail sales dropped a bit in December, the Census Bureau reports, adjusting for the holiday season–down 0.9 percent compared with November–which sounds like bad news for retailers and the landlords that lease space to them.

Retail sales dropped a bit in December, the Census Bureau reports, adjusting for the holiday season–down 0.9 percent compared with November–which sounds like bad news for retailers and the landlords that lease space to them. But monthly reports are mostly noise: since last year, retail sales are up 3.2 percent. If you take gasoline out of the equation (and you should, since gas is prone to vast swings in price spurred by the vicissitudes of the international oil market), then retail sales grew 5.5 percent since last year. A healthy number. Does it mean a wave of retail development is in the offing at last?

Probably not. Demand for new retail space has been anemic since the onset of the recession, and it remains so—it turns out that the recession by itself wasn’t the only thing that depressed the need for new space. More fundamental forces are at work, and while an improved economy might kick retail development out of the doldrums, it’s no sure thing. Much depends on wage growth, which needs to follow the current wave of job growth if consumers are to spend more vigorously. Also, in the longer-run, much depends on Millennials behaving at least something like their parents when it comes to shopping in physical stores.

For one thing, the 2000s was an excitable time in retail. A lot of space was developed–nearly 250 million square feet each year in ’05 and ’06, for instance–that lost tenants toward the end of the decade. Some of that space struggles on, though finally in 2014 vacancies came down close to 6 percent, or roughly where they were 10 years earlier (Marcus & Millichap stats).

But the market’s suffering from more than just the echoes of a long-ago building overhang. As the economy has become bifurcated into a smaller upper tier enjoying most of the benefits of higher incomes, and a larger lower tier suffering almost no income growth, so has retail bifurcated. It’s no secret, but it bears repeating: middle-market retail is in a tailspin. The age of the department store, except such upmarket purveyors as Von Mauer, is largely over. Bifurcation, it turns out, isn’t particularly good for mass development, since the mass middle market isn’t nearly what it used to be.

Then there’s the impact of technology on how people interact with retail space. The upshot: tech helps people use less retail space. Online purchases and handheld tech have been eating away at traditional stores–not suddenly, but bit by bit over the last decade and half. It isn’t entirely clear how far that trend will go, since in recent years some purely online retails have established physical stores, since shoppers do still like physical stores. It’s possible, then, that between slow wage growth, a nation divided into have-a-lots and have-a-lot-lesses, and retail tech platforms, a new normal of slow retail development has been established in this decade.