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State of the Industry

State of the Industry. Michael P. Kercheval President & CEO International Council of Shopping Centers. ESSENTIAL CONSUMER SPENDING NOW, PENT-UP DEMAND LATER U.S. economic recession is 15 months long so far—Expectation is that bottom will be reached by around mid year.

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State of the Industry

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  1. State of the Industry Michael P. KerchevalPresident & CEO International Council of Shopping Centers

  2. ESSENTIAL CONSUMER SPENDING NOW, PENT-UP DEMAND LATER • U.S. economic recession is 15 months long so far—Expectation is that bottom will be reached by around mid year. • Underlying Shift: Consumer spending shifted to essentials and “value” has been in for the last two years. • Motor vehicle is an important “signpost” for the recovery. Keep an eye on this sector, which is a microcosm of the economic problems. • 2009 still considered a “transition year” for the economy, but retail real estate lags. • INDUSTRY METRICS • Retail real estate recovery tied to financial crisis easing and improved economy (1½-2 years). • FISCAL POLICY HELP • Two-years to recover fully.

  3. Contraction Expected to Be Longest Since Great Depression, But Depth Consistent with Recent Deep Recessions The Duration and Depth of the Recession

  4. Employment Continues to Contract Sharply “Today’s Headlines” US Jobless Rate Highest Since Dec '83 US Lost 681K Jobs In Dec '08; Most Since Oct 1949 Labor Dept: US Has Lost 4.4M Jobs Since Recession Began US BLS: JOBS DROP IN PAST 4 MOS BIGGEST SINCE '75 US FEB NONFARM PAYROLLS -651K; UNEMP RATE 8.1% V 7.6% IN JAN Changing Composition of the Job Loss—Retail Job Share 14% of Total Job Loss Since Recession Began—Down from About 25%. Cumulative Job Loss Total = 4.38 million. jobsRetail = 609 thousandShopping Center = 429 thousand

  5. A Dramatic Change in the Consumers’ Spending Profile Consumer spending shifted to essentials...Three reasons: (1) Rising gasoline prices initially (but that has since then that reversed), (2) Weakening big ticket purchases (initially housing-related and now motor vehicles as well) and (3) Recession has slashed discretionary spending, such as on restaurants and apparel.

  6. Consumers Strengthen Their Savings Position Period Average Saving Rate Average Inflation Rate 1960-69 8.3% 2.3%1970-79 9.6 7.11980-89 9.0 5.61990-99 5.2 3.02000-08 1.6 2.9-------------------------------------------------------------------------------------------Dec 2008 3.9% -0.1%Jan 2009 5.0 -0.2

  7. The “Spending Worry” • Concern: Consumers intentionally raise their savings rate to some long-term average. • If that saving rate is consistent with 1990-2008 average, then that would be 3.5%--lower than where it is today. • If reversion is to 1970-2008 average, then that would mean 4.7%--about where it is today.

  8. Leading Indicator of Motor Vehicle Demand Leading Indicator May Have a “Long” (More Than One Year) Lead this Cycle. Where Vehicle Demand Goes, So Too Goes the Economy

  9. Low point to date, November 2008 (-2.7% for comp, -3.1% for total). • Pattern of lessened decline since November. • Luxury demand most negative segment. • Discounters and wholesale clubs (less fuel) posted strongest gain in February since June for discounters and September for wholesale clubs.

  10. Consumers Continue to Shift to Value Retailers for Staples and Other Supplies

  11. Gasoline Prices Played Havoc With Club Sales—Ex. Fuel Performance Robust..5.0% year-over-year growth in Feb. 2009…Average Pace Since April 2008 = 4.2% year-over-year

  12. Housing Market First into the recession, first out of the recession?

  13. Housing Market • Applications to purchase a home or refinance a loan soared 32% in the week ending March 20. • Refinancing surged 42% and the purchase index gained 4.2%. • Sales of new homes also rose 4.7% last month after six months of declines.

  14. Recession Impacts Stores’ Survival Ability - 13 - 10 bankruptcies tracked so far in 2009

  15. 10.9% in1994Q1 8.0% in 2008 Q4

  16. Why are we in a solid position, despite all of the negative economic news?

  17. First -Excesses that led to industry problems in the past have been reined in. We are not suffering from overbuilding, as was the case in the 1990s.

  18. New retail and shopping center space in the pipeline • Annual growth rate of new shopping center and retail space is on the order of 2-3%. Overall, the industry can absorb a slowdown.

  19. According to the Wall Street Journal: The amount of new offices and retail space built during the latest business cycle was much less than before the commercial real estate glut of the early 1990s.

  20. Second –Outstanding demographic outlook for retailers and shopping centers over the long term. • U.S. population expected to grow from 300 million to almost 440 million by 2050.

  21. Third -Shopping centers are no longer as dependent on a limited pool of mainstream anchor stores.

  22. Industry Definitions Used to Be Clear: • Super-regional centers • Regional centers • Power centers • Community centers • Neighborhood centers

  23. Centers Are More Dynamic and Diversified

  24. Outlook and Risks • ICSC forecasts a 4.9% decline in real GDP in first quarter of 2009 followed by lesser declines in second and third quarters and grow by 1.0% by the fourth quarter. • Employment should not decline as much in 2009 but little to no grow in 2010. • Consumer spending will grow in 2nd quarter. ICSC predicts that shopping center sales will increase by $7 billion or 0.3% in 2009 and by an extra $82 billion or 3.5% in 2010.

  25. ICSC Industry Stress Test • A loss of $114 billion in shopping center sales between 2009 and 2010 (worst case) would mean an increase of 0.3% in the vacancy rate and an additional loss of 309,000 jobs in the industry. • An increase of $279 billion in sales between 2009 and 2010 (best case) would mean a decrease of 0.6% in the vacancy rate and a 491,000 job gain.

  26. Half Filled or Half Empty?

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