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Economic Forecast from ICSC 2002 - Toronto

By Stu Wells         October 9, 2002 

Live from New York itís Ö..

Well, actually, itís Tuesday and itís live from the Toronto Metro Convention Centre. Iíve just come from the Tuesday session of the International Council of Shopping Centres annual Dealmaking and Trade Exposition. I was interested to see what the mood would be in Toronto this year. The 2001 convention stumbled in the wake of September 11, with reduced attendance, understandably subdued conversation, pervasive gloom and a generally pessimistic outlook.

There is no doubt that the effects of 9/11 and the meltdown in the equity markets have left this year producing a curious mix of both good and some potentially very bad outlooks. The main theme seems to be one of uncertainty.

Renť Tremblay, President and CEO Ivanhoe Cambridge and VP Canadian Division of ICSC, opened his remarks after breakfast with the observation that with post 9/11 hangover, consumer confidence is still struggling. He expressed optimism that recovery, while slow, is on the horizon, perhaps even underway. As weíll see later in this article, this view is not shared by all.

Contradictions abound. Take a look at the Convention. Registration is up substantially over last year, apparently somewhere around 1500 according to Michael Kercheval, President and CEO of ICSC. Diane Lemm, VP Mall Services with Northwest Atlantic (Canada) , reported that food court representation this year is at the highest ever, as is the level of corporate sponsorship. Some commented privately, however, that there were fewer booths in the deal making sessions and that deals were hard to come by. I guess it depends upon who you talk to. To me, the dealmaking floor somehow looks smaller this year.

Mike Pelyk, VP, Retail Leasing at Oxford Properties Group talked briefly about the effects of ongoing concentration in the industry, particularly at the ownership level, but also among the tenants too. I detected a lament in his tone that the industry, perhaps as a result of institutional control, is falling victim to the gods of NOI and ROI and losing some of its entrepreneurial spirit in the process.

Gary Rappaport, ICSC Chairman, and President of The Rappaport Companies, focused principally on the need for developers, tenants and approving authorities to work together, in the classic P3 vein, to address the difficult issues the industry faces. Representatives of municipalities are the fastest growing group of new ICSC members in the United States. He identified a very strong anti-development attitude that seems to be developing, particularly in the United States. Tough enough to make the economics work without layering on a "no new mall" mentality.

Itís always interesting to hear commentary under the topic "Economic Review". Forward looking conventions are often bang on. On the state of the economy, some experts seem optimistic about things not getting too much worse (if thatís not a spin, I donít know what is). While the economy in Canada is the strongest itís been in years, there is widespread disillusionment and a lack of confidence.

Dr. Sherry Cooper, EVP of Bank of Montreal Group of Companies and Chief Economist at BMO Nesbitt Burns, and Peter Sharp, President and CEO of Cadillac Fairview, both shared some very interesting observations. Both see many contradictions in the market place. Economic activity in Canada, by some measures, is astonishingly good. Canada is outperforming all countries in the G7. Job creation is excellent, inflation is under control, interest rates are near historic lows, the deficit is controlled (at least temporarily), the housing market is strong, some retail sectors (especially housing related, like home furnishings, big ticket items, renovation services and appliances) and auto sales are exceedingly strong. Despite all the seeming good news, consumers are very uneasy, even anxious about the future. Most positive indicators in the economy have been hugely discounted and the Canadian dollar is languishing.

The experts donít seem to disagree that with the enormous loss of wealth in the equity markets, record consumer indebtedness (helped along by the attraction of low or zero interest borrowing opportunities), a perception of job uncertainty and a general lack of confidence and trust, consumers will soon inevitably feel compelled to start aggressively saving for the future. At some point, perhaps starting now, sales will retreat. Increased competition is reported to be harming traditional shopping centre sales as well. Retail sales are being carved off by direct sales by manufacturers and shopping channels, sales marketing on airlines, in airports, by charitable organizations, stadiums, universities, transit systems, utility and service suppliers, theatres and other venues, e-commerce, the re-emergence of sidewalk vendors and small store retailers. Some commentators see recent consolidation in the industry coming a little unstuck, needing to reverse its course, and starting to do so, and probably for the better.

The experts seem to agree that consumers have kept the numbers in the economy stronger than perhaps they should be. In the near term, consumers seem to be "spent out". As Diane McCarty put it, the experiences of the last 12 months have left consumers vulnerable, and this vulnerability magnifies the effects of bad news. The consumer "shock absorber" is about worn out. Most endorsed the view that the salvage operation for the economy will have to come from the business sector.

On the investment side, real estate has been viewed very favorably during the past number of months (as Darren Donnelly observed at UDIís September seminar on Commercial Real Estate) but is considered to be perhaps now overpriced. Arguably, too much money has been chasing too little quality real estate as investors have fled the equity markets for perceived safe haven. If rates stay low, and they ought to, real estate is expected to remain relatively stable and a safe income producing investment. There are clouds on the horizon. In the short to medium term, the optimistic outlook is one that says, "it shouldnít get much worse". Real estate has enjoyed solid performance, especially in the face of equity market meltdown, but at some point, perhaps soon, that avenue will be exhausted. Consumer spending seems to be already.

Consumers in the U.S. are viewed as significantly overextended and the U.S. economy is faltering. Retail sales are very weak in the U.S., especially if auto sales are taken out of the mix. Auto sales themselves are representative of a huge amount of consumer debt. The U.S. had a net loss of jobs in the past year, while Canada grew. The U.S has lost a huge number of high paying, white collar jobs. Record levels of professional and management unemployment are not reflected in the unemployment numbers. The worse news, according to Sherry Cooper, is that the U.S. is doing better than the rest of the world, except Canada.

A real question to ponder, is how long can Canada continue to grow while its main trading partner is struggling?

All commentators seem to agree that there is not a robust period ahead of us. In Canada, consumer spending can be expected to slow down. In the U.S., "consumers have already gone home". Fairly flat sales would be an "optimistic" expectation for the next 12 to 18 months.

On an even darker note, while Sherry Cooper doesnít perceive inflation to be a threat, she recognizes a prospect, perhaps somewhat remote, but a very scary one nevertheless, of deflation, much like Japan has been experiencing for years. Deflation is already occurring in some sectors such as hospitality, travel and technology. If consumers begin to postpone expenditures in a large number of other sectors, because prices are falling, little can be done to turn it around. In Japan, when interest rates got to zero, nothing could be done to stimulate the economy. It hasnít happened here, yet, but Sherry strongly urges government to stay away form anti-inflationary policy. Itís medicine that could kill us.

Any good news? There is some. Most of the commentators at the Convention believe that business will step into the breach and lead the recovery. Business is working on it, cutting costs, getting the house in order, consolidating, and generally getting well positioned to be profitable again. The business sector is viewed as having been properly chastened by the collapse in the equity markets and the loss of trust in business ethics. Corporate predictions now are much more conservative, and more reliable. Industrial efficiency, particularly in the U.S., is at a very high level. A strong "non stock market" retail industry is emerging. Successful retailers from countries like France, Spain, Sweden and Germany are in Canada looking for opportunities. The industry is getting more innovative and is reacting very well to change. Competition among retailers is providing more choice to consumers. Developers are tapping new sources of funds and creating new concepts, like hybrid centres, replacing failed anchors with Big Box tenants. An interesting mix. Inflation and interest rates should stay low. Increased saving by consumers will find its way back into the equity markets, confidence will grow, and with it, the shopping centre industry will once again thrive.


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