-By David Kepron, AIA, LEED® AP

Economic Amusement Park?

I never particularly loved amusement parks. The food isn’t good, and why eat anyway if you’re likely to forfeit it after being spun upside-down on the Monster Barfalator? I never saw the allure of white-knuckling it around the roller-coaster track, careening around blind corners on the edge of certain death. It all seemed better to me when you were coasting into the end knowing you had survived, glad to know ‘that’ was over.

This past 18 months have felt like that roller coaster—an economy in a tailspin, with more folks than me wanting to get off or simply see the end into which they could gently coast. With the release of the Federal Reserve Beige Book and other economic indicators at the end of July, we might finally be getting off the ride and onto the road to feeling better. And how we feel, as in the Consumer Confidence Index, has a great deal to do with signs of recovery.

The Conference Board Consumer Confidence Index®, which had retreated in June, declined further in July. The Index now stands at 46.6 (1985 =100), down from 49.3 in June. The Present Situation Index decreased to 23.4 from 25.0 last month. The Expectations Index declined to 62.0 from 65.5 in June. The Consumer Confidence Survey® is based on a representative sample of 5,000 U.S. households. (The monthly survey is conducted for The Conference Board by TNS, the world's largest custom research company.)

From a report published by the Conference Board on July 28, Lynn Franco, director of The Conference Board Consumer Research Center, said: "Consumer confidence, which had rebounded strongly in late spring, has faded in the last two months. The decline in the Present Situation Index was caused primarily by a worsening job market, as the percent of consumers claiming jobs are hard to get rose sharply. The decline in the Expectations Index was more the result of an increase in the proportion of consumers expecting no change in business and labor market conditions… more consumers are pessimistic about their income expectations, which does not bode well for spending in the months ahead."

The end of the second quarter of 2009 showed the U.S. Gross Domestic Product (GDP)—a broad measure of the value of goods and services produced including everything from cars, clothes, computers, to makeup, manicure and machinery—contracting at 1 percent the annual rate. This isn’t a good thing unless you consider that this is its slowest pace in a year—a marked improvement from the first quarter of 2009, which contracted at 6.4 percent, and Q4 of 2008 at 5.4 percent.

The silver lining in the pullback in production is that businesses have slashed their inventories in the second quarter, and now that shelves need restocking, businesses will likely have to kick-start production to meet customer demand—assuming the consumer is buying. Some economists think that the July to September quarter could be more vigorous than previously forecasted, possibly 3 percent annual growth or slightly higher.

No bees, no honey

With the release of these numbers the White House wasn’t predicting clear sailing ahead: “As far as I’m concerned we won’t have a recovery as long as we keep losing jobs,” President Barack Obama said on Friday, July 31. Without jobs, this recession—confirmed as a period of the worst decline in economic output since the government started keeping quarterly figures in 1947—is unlikely to rebound and stop our heads from spinning for some time. Despite the GDP’s slowing rate of decline, the stress of rising unemployment, smaller paychecks, and reduced nest eggs led to Americans to spend less in the second quarter. Until we feel that our feet are firmly resting on the ground our economy, which is fundamentally connected to consumer spending supplying fully two-thirds of the U.S. economic activity, will be slow to recover.

Unemployment continued to be a concern for economists and consumers alike. Citing the words of my wife’s late grandmother, “No bees, no honey. No work, no money.” The unemployment rate stayed at 9.5 percent, continuing to undermine confidence in the economy, as fear of job losses keeps people’s money in their pockets. The Personal Savings Rate published by the Bureau of Economic Analysis at the U.S. Department of Labor— savings as a percentage of disposable personal income—was 5.2 percent in the second quarter, compared with 4.0 percent in Q1.

According to the Consensus Construction Forecast released on July 10, 2009, by Kermit Baker, PhD, Hon. AIA, chief economist, as the economy has declined, business payrolls have been reduced. The U.S. economy has lost 6 million jobs since the recession has begun, almost 3 million of which have been lost from January through May, and the construction industry has taken the heaviest hits. “Though construction industry accounts for just over 5 percent of all payroll employment in the economy, it has absorbed more than 20 percent of job losses since the national economic downturn began. From peak employment levels last in July 2008 through April 2009, architectural firms have lost almost 31,000 positions or almost 14 percent of total employment at firms,” said Baker.

The unemployment roles continue to climb with payrolls declining by 467,000 jobs in June. The construction industry remains weak and shed 79,000 jobs in July. Even if the recession really ends later this year, “the job market will remain weak; companies are expected to keep cutting payroll through the backend of this year,” says Baker.

Construction contraction

All of the payroll losses in architecture and design firms come as a result of the slowing rate of both residential construction and commercial construction. According to Baker’s Consensus Construction Forecast, “Though the recession is said to have started officially at the beginning of 2008, nonresidential construction held up well into the year due to the large number of projects already underway.” By the end of May 2009 the housing market was nearing the end of its correction, while the drop in nonresidential investment was just getting started. McGraw Hill Construction recently reported that construction starts on nonresidential buildings was now down 43 percent through the first five months of 2009 compared to the same time in 2008.

In terms of the outlook, commercial projects are projected to see the steepest declines over the downturn, reaching almost 25 percent this year and another 15 percent in 2010. “If these numbers materialize, this would be the most significant downturn in nonresidential construction in more than a generation,” Baker says.

Following the “no work, no money” adage, the AIA Architecture Billings Index (ABI), which measures design activity at U.S. architecture firms, has been declining since early 2008, indicating that there is substantially less activity at present in the design pipeline. The ABI dropped to 37.7 in June. (A number over 50 indicates growth.) In fact, it has been 18 months since the Index has been over 50, according to the AIA.

One interesting fact outlined in the recent ABI report is that the Index of Inquiries into new projects had a score of 53.8 in July, marking the fourth consecutive month showing growth in the number of requests for proposals and project inquiries. Curious that the number of inquires for new projects has increased but billings have not. This, it is suggested in the report, is an indication that we are seeing a change in how potential clients are searching for design services. “Several respondents to the ABI June survey noted that they are seeing more competition on new work and feel that prospective clients are simply casting a wider net in looking for bidders on design projects, which generates more inquiries but necessarily more work”, says Baker.

Looking for solid ground? When asked to compare anticipated firm billings for the second half of 2009 to the first six months of the year, the response was overwhelmingly negative, with nearly half of firms surveyed in the ABI report (46 percent) indicating that they expect billings to decline. Fewer than 30 percent believe that billings will increase in the second half of the year, and 25 percent anticipate that they will remain at he same level as they are currently.

Retail roller coaster

Unfortunately for retailers, their position at the front of the roller coaster of consumer spending does not translate directly to a rapid turnaround when the economy’s rate of decline slows and even experiences an uptick. According to a Forbes.com article last fall, titled “How Retailers Can Make The Best of Downturn:” “Declining sales followed by a sluggish recovery period means that retailers should continue to move on minimizing performance deterioration by cutting costs through closing stores, restructuring support functions, refreshing stores, and promotions.”

While the downturn is showing signs of stabilizing, retailers will have to continue to shift their practices to adjust to a new conception of “normal.” According to a March 19 report by PricewaterhouseCoopers and Retail Forward, titled “How Will This Recession Affect the Future of Retailing:”  “In an all out effort to lure scarce shoppers, 2009 will be a very promotional environment.” Frank Badillo, senior economist with Retail Forward, says, “Price-cutting pressure amid weak demand will continue to make this recession more difficult than prior recessions.”

Major U.S. retailers closed nearly 7,000 stores while opening approximately 5,700 new locations in 2008, resulting in net loss of 1,000 for the year according to a CoStar Group Inc. news report from April 29, 2009.  The approximately 250 major retailers that CoStar Group included in the study have reported plans to open nearly 4,000 and close 3,600 in 2009. The major retailers that CoStar Group sampled for the study opened nearly 6,500 stores in 2007 and 5,700 stores in 2008. If the +/- 4,000 store openings planned for 2009 actually happen, store opening activity would be down 39 percent, compared to 2007. As the recession has continued to ride downward, retailers in the electronics, discount department, jewelry, apparel, and office supply are projecting the biggest losses in store count in 2009.

“NRF 2009 Back-to-school Consumer Intentions and Actions Survey,” conducted by BIG Research and released on July 14, explains that 4 out of 5 (85 percent) Americans have made changes to back-to-school plans this year. Some of those changes include spending—56.2 percent of shoppers hunting for sales more often, 49.6 percent planning to spend less overall, 41.7 percent purchasing more generic brand products, and 40 percent planning to increase their use of coupons. “While discount stores will be the most popular destination for shoppers this year (74.5 percent), drugstores will see a substantial increase with 21.5 percent of families planning to shop their neighborhood CVS, Walgreens, Rite-Aid, and the like. This is an increase of 18 percent over 2008, “ the NRF report states.

The NRF’s Back-to College survey found that college students and their parents will spend and average of $618.12 this year, up 3 percent from last year’s $599.38. With fewer people planning to attend college this fall, spending will decrease to $30.08 billion. According to the survey, “back-to-college buyers say the economy will cause them to spend less overall (48.0 percent), shop for sales more often (46.1 percent), and compare shop with ads and circulars (30.8 percent).”

Of college students polled, 12.8 percent said the economy will impact where they choose to live with many choosing to save money by living at home, thus affecting home furnishings retailers, as fewer people will be buying items for dorm rooms and off campus housing. And college students also will heavily increase their use of drugstores this year. According to the survey, 23.4 percent of back-to-college shoppers will buy at drugstores— a 14.3 percent increase over 2008.

All of these issues combined suggest that on a net basis, as a percentage of total store count, retailers in the drugstore, pet supply, dollar/deep discount, warehouse club, grocery, and big box discount categories are projecting the biggest gain in stores in 2009. (See chart for Retail Sales Summary for the past year.)

Stop the ride. We want to get off

As we continue to roll through the recession, and retailers continue to suffer month after month, landlords are getting pressured to find some way to offer relief. The rising number of store closings leaves mall owners in a vulnerable position, hoping to project a positive outlook to their clientele to say nothing about decreased revenue. That in turn allows for negotiation on the part of retailers to maintain their leases, perhaps at reduced rates and stave off the image of malls becoming littered with vacant stores.

In an article titled “Empty Mall Stores Trigger Rent Cuts—Remaining tenants Point to Occupancy Guarantees to Shave Costs or Escape Leases” (Wall Street Journal, July 10, 2009), tenants like Gap, Inc., Williams Sonoma, and Ann Taylor are poring over their leases and dispatching staff to track store closures that trigger co-tenancy clauses. Co-tenancy clauses allow tenants to demand cuts in rent or eventually, a penalty free pullout—if key tenants or a specified number of stores leave the center.

Rent is among one of the biggest expenses for retailers. As sales continue to drop, the fixed cost of rent eats into margin. The average retailer spent approx 12 percent of sales on rent in 2008 and continuing decreases in margins signals the possibility of joining the roles of closed stores. The effect is like a stack of dominos arranged in a circle being knocked over, except that they stand themselves back up and create a loop.  Store failures trigger co-tenancy violations, which in turn lead to cancelled leases, which in turn leads to more vacancies and more violations. And so on. The vacancy rate at malls is at a multiyear high, and retailers are doing all they can to decrease rents and stay viable.

The end of the ride

The end is in sight, though still out a ways and undoubtedly around one of those curves or another drop that leaves you a bit queasy. “Overall commercial construction is forecasted to decline 25 percent this year and another 15 percent in 2010. The hotel market, which may have been bit overheated heading into the recession, may take the biggest hit through 2010, but retail construction and offices won’t be far behind,” says Baker.

With the overwhelming depth of government statistics, economic reports, and increasing numbers of store closings ever-present, one thing is certain: the design world we knew prior to 2008 is a memory. We can collectively say, “I don’t want to do ‘that’ again.” And we won’t, because hopefully along the twisting track we’ve follow this past year, we will have learned a great deal about how to run an architecture design business on our newfound stable ground.

As New York Retail Studio Principal for Little, David Kepron, AIA, LEED® AP, RDI, is responsible for managing all aspects of Little’s Retail Practice Area in New York City. (DKepron@littleonline.com, www.littleonline.com)

For an exclusive Nielsen report on Global Consumer Confidence, Concerns, and Spending Habits in the first half of 2009, click here.

For more on the current state of the retail sector, click here.