Although retail sales and sector share prices have rallied back to the all-time highs they hit in 2007, retail property prices remain depressed. As the chart below shows, this unusual divergence has grown significantly since the latter half of 2008.

There are any number of possible reasons for the widening disparity. Among them:

  1. Better-than-industry-average sales growth at small and nontraditional online retailers, which has bolstered overall sales without creating a concomitant need for additional stores and malls. For the most part, large online retailers like Amazon (AMZN) and well-known bricks-and-mortar chains with significant online presence like Best Buy (BBY) are included in the retailing index.
  2. Consolidation in the sector. A shrinking number of large firms have garnered a rising share of overall consumer spending without having to add to their existing selling space. The empty facilities of failed competitors, meanwhile, have boosted overall supply, thereby depressing prices.
  3. Shifting consumption patterns. People are paying more for essentials like food and fuel, and less for myriad goods sold at other outlets, including department stores, big-box retailers and national chains that might otherwise be expanding and soaking up commercial real estate that is on offer.
  4. The impact of federal government action. Bailouts, stimulus programs and Federal Reserve easy-money policies have bolstered stock prices and boosted high-end consumption via the wealth affect.

One could argue that these developments aren't necessarily bullish for the share prices of the retail firms that have been at the forefront up until recently. For one thing, if online up-and-comers are growing fast, logic suggests they're gaining market share at large firms' expense. With employment and technological trends likely to draw a growing number of competitors into the online marketplace, the largest, least-nimble firms will find it hard to keep pace.

Moreover, while industry rationalization and consolidation will almost certainly continue, several years of essentially flat real (inflation-adjusted) sales growth suggest that the low-hanging fruit has probably been picked. Best Buy, for instance, has benefited from the failure of Circuit City, but how many other large, category-specific competitors does it have now? Walmart (WMT) is probably its primary rival nowadays.

And if essentials like fuel and food are accounting for a larger share of overall consumer spending, can that really be seen as a sign of a retail resurgence? People may be opening their wallets a bit wider, but it's not because they're more confident about the future. It's because they have no real choice.

Finally, while the Federal Reserve's latest round of quantitative easing -- QE2 -- and other such efforts have undoubtedly propped up share prices and afforded the wealthy more spending power, the average American hasn't really benefited as much. At the same time, the political winds are shifting in favor of greater fiscal prudence and a constrained Fed. Retailers at the top of the food chain will invariably suffer as a result.

In sum, the chart above doesn't just help explain how things got to where they are. In my view, it also offers some insights about where they're headed next. Among other things, it suggests that while bigger has been better these past few years as far as retailing is concerned, a reversal of fortunes is likely at hand. Smaller retailers, most of which won't be publicly listed, stand to benefit in a world where the ability to adapt quickly to changing economic, social and technological circumstances offers a critical advantage.

With that in mind, one can only conclude that the share prices of the larger operators will suffer as a result.

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Aside from the issues you have discussed in your article; because current federal and state regulations require more vigilance (than before) to maintain safe interior environments for employees and customers, retailers and retail landlords are facing increased costs of owning, maintaining, operating, and renovating their real property. Higher costs of store operation or store ownership translate to lower property values. Please read further for my expanded explanation.
Retailers that occupy or own real estate and landlords that own property with retail tenants, are facing (or waking up to) certain state and federal regulations that require the retailers to maintain safe interior environments for their employees and their customers. Asbestos is one hot item; lead-based-paint is a lesser issue.
A February 2010, labor union (Local #78) protest in Manhattan, outside a CVS pharmacy on Columbus Avenue, near Lincoln Center, highlighted this issue with regard to asbestos.
See the February 2010, news story at:

To comply with environmental regulations and labor regulations (such as under OSHA), the retailers and/or owners of retail property may face certain costs to survey (and periodically re-survey) for contaminants and potential contaminants, maintain property at what might be a higher standard than was previously respected, institute new maintenance protocols within their organizations; potentially remediate contaminants in their property, and set aside funds to pay for latent liability that is uncovered.
In the case of asbestos, since, medical issues (with employees) can become evident long after initial exposure to asbestos, funding potential health/medical liability is a challenging issue; and insuring against such latent liability could be expensive—if insurance were even available.
If funding current and potential environmental liabilities cuts into store profits; then retailers will want to pay less rent. Hence, all else being equal, we might expect downward pressure on property values originating with the need to fund current and potential environmental costs and liabilities.
Incidentally, for publicly traded companies, SEC regulations may require disclosure of environmental liability and related costs and liabilities.
Please note, the Obama administration has promised increased enforcement on environmental matters. See:

January 26 2011 at 6:33 PM Report abuse rate up rate down Reply

Actually, there is very little about the ongoing depressed retail property pricing that is negative for the big box retailers...just the opposite really.

RENT is a huge component of retailer costs and depressed prices suggests an imbalance of supply over demand. Therefore, when it comes time to renegotiate rents, the retailers are in the driver's seat.

In addition, there is more incentive for retailers to BUY rather than lease their properties...especially in the current era of artificially low interest rates. In fact, several large retailers including Dillard are reported to be considering forming captive REITs for the exact purpose of buying their properties.

The chart depicted is therefore, generally bullish for retail stocks...not bearish.

January 26 2011 at 3:17 PM Report abuse +1 rate up rate down Reply

Everyone of us old folks who saw young people wwith hugh mortgages and 3 SUV's, a boat andd trips was wondering how they were doing it when we had more money than them. Well they were not, now they are homeless or back living off parents or renting.
I must say they tried getting my son to buy a $300,000 home, but he knew it was riduclouis. So he only broke even after losing his store to the recession.

It seems we do not teach economics in school any more and recently heard a girl had $100,000 in loans for a BS degree, you sh "ting me. If i knew i could save $100, 000 in 4 yrs, I wash dishes, what are people thinking.

So why did anyone expect them to think about what they have to spend

January 26 2011 at 12:52 PM Report abuse +1 rate up rate down Reply

Good general article, Mike, but it would mean so much more if the green line, Adjusted Retail & Food Services, were separated into two groups. The food part with the other necessary items like shelter, in contrast to general "stuff" buying. Your graph would then point out not only the buying trends of the public but also retail space is going through the same downhill spiral as the housing market. Yesterday there was a news item of J.C. Penney closing some places. In my area, J.C. is one of two anchors to the only big shopping mall with some 50-60 smaller shops around it. With a new Super Wally opening up recently just 4 miles down the road, three guesses what will happen if J.C. closed here.

January 26 2011 at 11:48 AM Report abuse rate up rate down Reply

just going to be the next tsanumi. they are practicing SAP policy--Sit And Pray.
can only last so long before these dominoes start falling.

January 26 2011 at 11:44 AM Report abuse +1 rate up rate down Reply