by Erik Bruvold
Thursday, October 1, 2009
Four miles from my neighborhood is one of the many “community serving” retail centers that dot San Diego’s landscape. Built in 1993 and with more than 500,000 square feet of space, it prospered during the boom of the first half of the decade.
Oh what a difference a recession makes.
The Mervyn’s and Circuit City that anchored the center are shuttered. The Sears is never busy. The fast food and casual dining locations seem to be holding on but the small non-chain retailers are struggling and two owners that I know tell me things are extremely tough.
This shopping center is located in one of the City of San Diego’s more prosperous zip codes with an estimated household income of close to $70,000. The shuttered big boxes stand as stark testament to the devastating impact this recession has had on retail trade.
The regional numbers are sobering. In August there were some 133,500 San Diegans employed in retailing. That was a decrease of 8,300 from August 2008 and down 14,400 (or 9.7%) from August 2007. Cushman & Wakefield report that year-over-year retail rates were down between 4.7% and 6.1% over the past 12 months. As noted in the most recent NUSIPR Economic Ledger, after decades of rising consumption San Diegans have significantly increased their personal savings rate.
That is natural and rational behavior. Unlike most post-war recessions, this downturn has seen significant job losses among white collar workers, putting many families for the first time in a precarious financial situation. It has refocused households on the need to build nest eggs for contingencies. San Diegans have rightly questioned the prudence of planning on rapidly escalating home values or double digit gains in stock indexes. Indeed, dramatic declines in housing equity and increased lending standards have made it difficult for San Diego consumers to pull money out of housing to use on other forms of consumption. There is every reason to believe that the decline in consumption is not a temporary phenomenon but will be a hallmark of a transformed regional and national economy.
At the same time demand is depressed, lower retail profit margins and increased percentage of sales made over the internet are adding to the distress of pain for brick-and-mortar retailers. Looming on the horizon are potential health care overhauls that could mandate coverage. Retailers are likely to rationally respond to such regulations by minimizing labor through increased use of automated checkouts, reducing staffing, and driving customers toward making on-line purchases. All told, these factors make it improbable that we will see a rebound in retail employment.
Shifts away from consumption also will have a dramatic impact on municipal finance. Several cities in the region have become heavily dependent upon sales tax revenues. For example, in fiscal year 2007 sales tax receipts accounted for 46% of National City’s general fund revenues. For Escondido the figure was 31%. As the pie shrinks, the wars between cities for sales tax generating businesses will become more intense. Local governments are likely to redouble efforts to find retailers willing to locate on their borders and “steal” shoppers away from adjacent jurisdictions. Expect those retailers that remain to drive hard bargains for decreased fees, increased incentives and subsidies.
Finally, a long-term shift away from consumption and retail sales has profound implications for how this region grows. A central tenant of “smart-growth” plans in the region has been that there would be more residential and retail mixed-used developments. Planners were hoping for scores of “lifestyle” centers with retail business on the bottom and condos and apartments above. What happens to such plans if there is an overabundance of existing retail space and reluctance by investors to build more?
Over the long term, San Diego and the overall U.S. economy are going to benefit from less consumption and increased savings rates. The level of investment in infrastructure and productive capital will increase. The challenge for both public and private sectors in San Diego will be navigating this change, embracing and managing through the transformation rather than trying to wish it away.