Shakespeare once penned the words, “what is past is prologue,” which roughly translates into what’s already happened merely sets the scene for the truly important stuff. That is where Nevada finds itself with regard to its retail market; battered by the trends of the recent past and weary for what is to come.
Since the beginning of 2008 some 7,300 retailers nationally are out of business or have filed for bankruptcy and Nevada has been anything but immune in this sector. Looking down the long tunnel of recovery there is a glimmer of light at the end of the gloom, but that distant beacon will not forestall a barrage of continued retail vacancies coupled with low absorption, a growing number of out-of-business signs and statewide weak consumer spending.
As all things have a cause and effect, so retail follows consumerism and visa-versa. But make no mistake, the retailer and the consumer are joined at the hip. Without consumer spending, retailers cannot pay rent; overstocked durable goods languish on store shelves; manufactures are told “Don’t ship any more products;” unemployment claims skyrocket and consumers hold on tightly to precious greenbacks.
When boom times signaled a development and building retail spree in Nevada, little or no interest was paid to the unbridled growth. It was full speed ahead as retailers got what they wanted. Then in the last quarter of 2007, cracks in the system began to show. As wide-eyed economic experts teetered on the brink of calling the state of the nation’s economy, a recession, the experts whistled past the graveyard. The harsh reality was less than a year away, and by the last quarter of 2008, the cracks became wider.
“In recent months, the Las Vegas retail market has changed from a landlord’s market to a tenant’s market,” said Kit Graski, senior vice president of Voit Commercial Brokerage. “In the past, high demand for retail space allowed landlords to set lease terms and rates. However, as retailers are forced to contract as a result of today’s economic conditions, demand for retail space has dropped. Subsequently, tenants rather than landlords are taking the lead in lease negotiations, demanding lower rents and greater concessions.”
The driving force behind so many retailers going belly-up is weak consumer spending. Brian Gordon, principal of Las Vegas-based Applied Analysis agrees, “Consumers impact retailers and small businesses have been especially hard hit.” What is so devastating about this economy is its reach beyond small businesses to the so-called power centers of 100,000 square feet big box anchor retailers. Even neighborhood big box grocery stores are facing a similar fate as consumer spending for food has dropped.
“The retail market follows the residential market to a greater extent than other commercial real estate markets, as retailers are directly dependent on a local consumer population. For this reason, the decline of the housing market has significantly impacted the retail sector,” said Graski. “The development of retail product within the Las Vegas market was planned on the basis of the burgeoning housing market. As the housing market subsequently declined, so too did the population, which surrounded retail projects. Consequently, retailers are no longer serving a sufficient number of consumers.”
In the last few quarters droves of retailers have filed for bankruptcy, closed up their doors or relocated. Las Vegas and Reno-Sparks are a who’s who of retailers falling by the wayside.
Vacancy and Absorption
Applied Analysis reported that in the last quarter of 2008, vacancy rates wiped out net absorption gains [236,000 square feet of new retail space in Southern Nevada] accrued in the first three quarters of the year. By year’s end, the rapid pace of retail expansion bottomed out at a minus 155,000 square feet, setting the all time record of net losses since data was first complied in 1990.
Colliers International Las Vegas released a report detailing the damage to the retail market. Retail vacancy rates increased to 5.8 percent in the fourth quarter of 2008, 2.6 points higher than one year ago.
In Northern Nevada, citing a similar fate found in a recent NAI Alliance report, Applied Analysis reported that absorption rates peaked at an 18 year high in 2008, when the retail economic downturn smoke cleared, net absorption gains verses vacancy came out to a minus 11,000 square feet.
Southern Nevada Closures
According to data provided by Colliers International Las Vegas Senior Vice President Scot Marker, in Southern Nevada four Chili’s Restaurant have closed; Albertson’s has closed seven stores; Circuit City has closed hundreds of its stores nationwide (four in Las Vegas and one in Sparks); a Zappos.com store closed as did several neighborhood grocery stores, such as Vons and Luckys. More recently Sportmans Warehouse closed two of the newly opened stores in Las Vegas and will close 23 nationally and is selling another 15 of its stores in a move to reduce bank debt.
Other retailers caught in the tailspin are The Great Indoors, an appliance and furnishings retailer located in the Boca Park Shopping Center in Las Vegas, has completely packed up. Another big name is Dillard’s, the high-end clothing retailer shut its doors at its Boulevard Mall outpost in Las Vegas.
“Stores like Linens N’ Things and Ethan Allen at the Galleria Mall just aren’t selling,” Gordon stated. He went on to say, “Weak consumer spending sent relatively low absorption rates downward, as retailers vacated selected centers of major anchor retail stores. Particularly hard hit is the I-215 Beltway area of North Las Vegas and regional areas of Henderson.”
Although the overall vacancy rate peaked in 2008 a 12 percent, anchor stores took a 10 percent vacancy hit. Couple that figure with line-shop vacancies which saw a 16 percent decline, there is approximately one million square feet of vacant retail space in the Reno-Sparks area. Clearly, the northern retail climate mirrors its southern counterpart. Retailers are seeing their profits dwindle, by 17 percent to 30 percent says Ken Mattison, vice president of Grubb and Ellis’ retail division. Adding to the woes, developers have opted to downsize, up size in phases or simply relocate.
“In the Reno-Sparks area, Comp USA and TGI Friday have shut down,” said Mattison. “Retailers follow rooftops.” The retail carnage does not end there. Again in the Reno-Sparks area, retailer Shoe Pavilion and Gottschalk’s filed for bankruptcy.
However, one mega development accounted for more than 400,000 of the 900,000 square feet of new retail square footage. A new Target store and Scheel’s Sporting Goods opened in the Legends at the Sparks Marina, a billion dollar retail development.
North Las Vegas
North Las Vegas is of special interest, noted Gordon because of the housing foreclosure crisis that has plagued the master-planned Aliante project. Once upon a time, North Las Vegas was the boom area of residential building. In good times, retailers, seeing the writing on the wall [lightening speed residential growth] went on a building spree. Hot on the heels of brand new homes and an influx of new homeowners, retail shopping centers sprang up alongside the new residential communities. But when foreclosures started to mount, the North Las Vegas retail market went bust.
“As a residential building boom sprang to life during 2004-2005, retailers gauged density by population numbers,” said Gordon. And then came the recession, layoffs and foreclosures. “Retailers pulled back particularly in the I-215 Beltway area of North Las Vegas.” The residential impact on retail is a redundancy at best.
Colliers International Las Vegas reports the vacancy of North Las Vegas at 6.2 percent, over 12,000 square feet of negative net absorption (QTD) and over a million square feet currently planned or under construction. These figures do not bode well for absorption in North Las Vegas.
“We are not anticipating any new development in any submarket, including North Las Vegas, until the absorption has caught up to supply,” said Brad Schnepf, president-elect of NAIOP and president of Marnell Properties in Las Vegas.
“Vacancy rates in Henderson are relatively low because there has not been any significant new construction of retail product in this market for the last two years,” said Graski. “However, vacancy has risen sharply within this market in areas where there is a high concentration of retail space. For example, vacancy rates have risen sharply around the Galleria Mall as large tenants such as Paddock Pools, Linens N’ Things and Shoe Pavilion have been forced to close.”
According to the retail report from Colliers International, vacancy increased this quarter over last in all submarkets except Henderson, where it decreased by one percent to 6.9 percent. Colliers also reports that Henderson had the only positive net absorption both year-to-date and quarter-to-date.
According to Graski, the purpose of the stimulus package was twofold. “The short term goal was to change people’s attitudes and harbor a feeling of confidence among consumers, which in turn would encourage them to spend more on consumer products,” said Graski. “The long term goal of the legislation was to inject capital into the economy in order to free up credit and create investment opportunities, thus reinvigorating the economy.”
Graski continued by saying, “The short term goal of the stimulus package has already failed. After the bill was passed, attitudes did not change and consumer spending remained flat. At this time, it is too early to say what the implications of the stimulus legislation will be for the retail market.”
Other experts, like Marker, are cautiously optimistic about current legislation and its effect on the retail market. “The stimulus package that was designed to help the economy could ultimately put things on the right track. Only time will tell if this measure works. One thing is for certain, this cycle will end and many retailers will change the way they do business,” said Marker. “Ultimately, retailers will have to adapt to the changing market and address the needs of the consumer. Strong retailers will continue to be successful. They will figure out how to get the consumer to keep coming back by providing a products and services that are a good value.”
Not Everyone is Down and Out
“There are two categories of retailers that are expanding in Nevada, retailers who are growing and retailers who are opportunistic,” said Graski. “The opportunistic retailers include large, strong companies who are utilizing the current market conditions to negotiate more space and lower rent rates in preparation for when consumer spending increases. For some retailers the slow economy has actually created some growth opportunities.” He cites McDonalds as an example of a fast food retailer that is actually expanding, likely attributable to the increasing price-conscientiousness of consumers in their restaurant choices.
Marker and Colliers International Las Vegas report that Olive Garden Restaurants, Chipotle Mexican Grill and BJ’s Restaurants are looking to further expand in Southern Nevada. Also expanding are the specialty retail grocery stores Trader’s Joe’s and Glaziers Grocer. Big box stores Costco and Wal-Mart are doing well in this current economic cycle with consumers spending their dollars on the basics for their households.
The short term outlook is unlikely to thrill the market, as there can be a continued expectation of retail consolidation and cautiousness. Unless consumers start spending more and saving less, retailers may be in for a continued jolt of vacancies. And yet with any period of radical change, opportunities are present and the market tends to emerge with healthier retailers for consumerism to engage.
“In the long term, I believe we will see growth in retail sectors,” said Schnepf. “The residential market is showing signs of recovery and we hope to see job growth throughout the coming months, which will also help the retail market.”