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Raub Report April 2014

April 8, 2014

For decades now, the U.S. economy has depended upon and been gaged by consumer consumption.  Consumer spending is watched closely by economic analysts for swings and indications of the health of the economy.  In the past few years, it has dipped because of the Great Recession and our desire to pay off debt and slim down our consumption of goods.

However, the face of retailing itself has changed tremendously in the past decade due to many new forces.   The National Association of Realtors “Commercial Connections” magazine stated that internet sales could increase from the current 6.5% of sales today to above 15% in the next five or six years.  We have already seen the demise of Borders Books, Circuit City, and then Barnes & Noble and Best Buy are barely holding on.

How will the 1-million square foot Amazon distribution center in Schertz affect San Antonio retailers in the future?  Same-day delivery of almost any item is a real game changer for local retailers. This may even include groceries at some point and that will have an enormous impact on HEB, Wal-Mart and Target stores.

Think about the small retail centers along every major street.  In times past, local merchants sold goods that you took home or to work and used.  Now the standard tenant does not sell goods because those can be bought more cheaply on line or at the major stores.  Local businesses are in the service business providing something that has to be visited to be consumed: hair salons, fitness centers, nail salons, chiropractor, doctor, dentist, C.P.A., acupuncture, mortgage office, money manager, insurance office, etc.  No longer are these centers purely retail; they retail services centers.

Likewise, the development community has been greatly affected.  Before the Great Fall (of 2008) national retailers relied on “preferred developers” to find new locations, work through the barriers to entry each city government erects in their building codes, and then construct these stores and maybe own them or maybe sell to investors.  This method allowed retailers to roll out dozens or hundreds of stores in a few year period to gain market share over competitors and build creditable volumes of business to satisfy investors, Wall Street and suppliers and national advertising campaigns.  Now, the retailers are under such pressure in profit margins, the development community can’t produce the new stores on the low margin demanded by the retailers, resulting in slower new store growth and less business for developers.

 These trends also affect investors who are depending on the rents from local retailers to support their properties.  It impacts the quantity and quality of cash flow and then, the capitalization value of the property for resale, too.  However, the city continues to grow, there is very little new retail being developed and rents are rising. Changes to beware of.

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