Lack of consumer spending drags on real estate

On a recent trip to Gloucester, Rockport and Newburyport in Massachusetts, the weather started out brilliantly, but nonetheless the crowds were light, there were no lines or waiting at the restaurants and the shops seemed quiet as well.Anecdotal reports said July had been good, but August was slow. Of course, I was looking at real estate. Most interestingly, there were many closed retail shops for lease and for sale.One small retail shop in Rockport was listed for sale at $450 per square foot. Given the current soft tourism economy, that is no bargain. (I would guess that $300 per square foot is more like it). The rule of thumb is that “occupancy” should not be more than 8 percent to 10 percent of sales. Thus, the tenant would need more than $400 per square foot of sales to begin to make the numbers work. Given a five-month season, these numbers are somewhat challenging.Those owners and managers I spoke with said they need next year to be better. They will survive 2010, but they are either not making money or are eating into their reserves. One T-shirt vendor even said he was down 45 percent.If this Great Recession continues, it corroborates what we see and hear from manufacturers and many service companies. Many retailers are holding on by their fingernails and they are weary. If things do not improve next year, some will pack it in.Inflation? Deflation?So what are we facing, inflation or deflation? Beats me. My best guess is 50-50, either inflation due to the overburden of massive public debt, or deflation caused by the stagnant economy. Here at Norton Asset Management, we are developing business plans for both scenarios.Inflation can be good for real estate investors, but bad for tenants who struggle to pay rising rents when they cannot raise their prices high enough or fast enough.Last week we were told that China overcame Japan as the world’s second-largest economy. This is no great surprise on one hand, but it happened sooner than many had predicted. At the same time Germany’s economy has perked up. Unemployment in Germany has dropped from 13 percent to 7.6 percent, while euro zone unemployment is still at 10 percent. But the rest of Europe, besides Germany, is still very lethargic.What do China, Japan, Germany and the rest of Europe have to do with commercial real estate here in New England?At the risk of being overly simplistic – it is all about jobs. It takes jobs to fill buildings and jobs are not being created here in New England or the United States in general. Job creation here in the states is very much connected to manufacturing and trade with China, investment and joint ventures with Japan, and trade with Europe.This globalization thing is here to stay and while it was exciting and powerful in the late ‘90s and early 2000s, it is complex and very difficult to decipher as we enter the second decade of this century.Returning to those shops on the seacoast of Massachusetts’s North Shore, I saw 10 things made in China for every one from Japan or Europe. And many of the shops were higher end, not just T-shirts and trinkets.When consumers drive the U.S. economy by 70 percent to 75 percent, and the average savings rate now is up to 6 percent to 7 percent, it takes a considerable amount of international trade of both goods and services to fill the gap. Domestic government stimulus spending won’t move the needle.Let’s hope for a more energized fall, especially after the fall elections.Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE) and a Facilities Management Administrator (FMA) with the Building Owners and Managers Association. He can be reached