Retail will see shakeout

Real Estate Weekly, Jan 16, 2002 by Corey Bialow

The week after Thanksgiving it took a panel of economists known as the National Bureau of Economic Research (NBER) to finally state the obvious, "our economy is currently in a recession". However, the retail sector had already begun to feel the repercussions much earlier of this recent slowdow in economic growth.

The events of Sept. 11, although unprecedented in terms of its economic and psychological impact throughout the country, I believe simply accelerated the inevitable slowdown of the retail real estate market throughout the United States. It was the proverbial "straw that broke the camel's back".

The New York Metropolitan area in particular will probably experience a much greater downturn within the retail sector than other parts of the country.

During the past 6-7 years, as the commercial real estate market grew steadily throughout the country, the New York Metropolitan area became the pinnacle of this success. The area experienced an unprecedented demand for retail space, driving rents in many prime shopping areas to double or even triple levels seen only a few years earlier.

The Manhattan real estate market has become a microcosm of what can potentially go wrong throughout the shopping center industry if an "equal balance" is not kept between landlords and tenants. This "equal balance" is based upon simple laws of supply and demand. If retailers are not profitable on the store level, they will not survive, ultimately slowing down the demand for retail space and upsetting the "balance." In keeping with this basic theory, if landlords and developers cannot operate their properties without turning a profit, the amount of developments will decrease, ultimately reducing the supply of available retail space again, upsetting that necessary "balance."

The occupancy costs of retail space in Manhattan have made it virtually impossible for many retail concepts to remain profitable on the store level. Many national retailers during the bull market saw New York City in particular as an integral part of their retail image as it relates to the investment community.

The events of Sept. 11 have become a rude awakening for many local and national retail chains that have seen tremendous declines in comp sales during the "ever important" Christmas season. For the first time in almost a decade, prominent retail space in New York City, as well as the major suburban retail markets, are remaining vacant. The favorite comment of those attempting to put a positive spin on the market is "rents have not dropped, they've simply leveled off." This is merely a result of the unwillingness of some landlords to accept these new market realities.

The eventual shakeout we will see within the retail sector will temporarily negatively impact our local economy, but this necessary "correction" will be a healthy step in restoring the "balance" that must remain for the long-term viability of the retail real estate market. As we peer through the looking glass into 2002 I can vaguely hear the talk of words unspoken for many years "Tenant Allowance Free Rent." From a retailer's perspective, that's "music to my ears."

At The Vitamin Shoppe, we have been extremely careful in plotting an expansion strategy that has avoided many of the over-expansion mistakes of our competitors. While we are set to unveil our 100th store and plan to open 40-50 additional stores in the next 12-18 months across the country, we have been highly-cautious in selecting markets with high barriers to entry, reasonable rents and landlords which value our business. This strategy has resulted in our position as the number one health-related discount retailer in the country.