The First Domino to Fall: Retail-CRE (Commercial Real Estate)

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The domino of retail CRE will not fall in isolation; it will topple the domino of debt next to it.

That the retail trade is stagnating has been well-established: for example, The Retail Death Rattle (The Burning Platform).

Equally well-established is the vulnerability of the bricks-n-mortar commercial real estate sector to this downturn: yesterday's analysis by Mark G. makes the case:After Seven Lean Years, Part 2: US Commercial Real Estate: The Present Position and Future Prospects.

I'd like to extend Mark's excellent analysis a bit because it suggests that the retail CRE (commercial real estate) sector will likely be the first domino to fall in the next financial crisis--the one we all know is brewing.

Let's start with two charts of retail that I have marked up: the first is a chart of retail traffic from The Burning Platform story above. Note the phenomenal building boom in retail space from 2000 to 2008: nine straight years of adding about 300 million square feet of retail space each year.

The second chart shows department store sales, which fell by 15% during the retail building boom.

It might be possible to argue that this additional 2.7 billion square feet of retail space was needed as competitors ate the department store chains' lunches, but let's start by considering the foundation of retail sales: consumer income and credit.

One way to measure income to adjust it for inflation (i.e. real income) and measure it per person (per capita) on a year-over-year (YoY) basis. Notice how real income per capita has absolutely cratered in the "too big to fail" quantitative easing (QE) era masterminded by the Federal Reserve: if this is success, I'd hate to see failure.

Another way to measure median household income:

There's a big problem with both per capita and median income measures: a significant gain in the the top 10%'s income will mask the decline in the bottom 90%'s income. If households earning $150,000 annually get a boost to $200,000, that $50,000 increase not only offsets the decline of nine households who saw their income decline from $35,000 to $31,500 annually, but pushes both the median and per capita income metrics higher even as 9 of 10 households experienced a 10% decline in income.

The point here is that the declines are far deeper for the bottom 90% than shown on these charts, as the top 10%'s increase in income has skewed median and per capita income higher. We can see this clearly in this chart:

Notice how the income of the top 10% diverged from the bottom 90% once the era of financialization and asset bubbles started in the early 1980s. Each asset bubble--housing in the late 1980s, tech in the 1990s and housing again in the 2000s--nudged the incomes of the bottom 90% briefly into marginally positive territory while it spiked the incomes of the top 10% into the stratosphere.

There are only two ways households can buy stuff: with income or credit/debt, as in charging purchases on credit cards. We've seen that income has tanked for the bottom 90%; how about credit/debt?

Courtesy of Chartist Friend from Pittsburgh, we can see that revolving consumer credit has flatlined:

There's another component to the erosion of bricks-n-mortar and the ascent of eCommerce, as Chartist Friend from Pittsburgh explains:

This M2 (money) velocity chart is better because it reminds us of the days when you would drive to the mall to make a purchase, and while you were there you'd stop at the food court to have lunch, and then maybe you'd walk around afterwards and see some other item you wanted to buy, or run into friends and decide to catch a movie or have a drink, etc. At the mall there are lots of ways for money to change hands - online not so much.

Fewer trips to the mall (correlated to maxed out credit cards, declining real disposable income and the ease of online shopping) also translates into fewer miles driven and fewer gallons of gasoline purchased:

All this boils down to one simple question: can the top 10% (roughly 11 million households) support the billions of square feet of retail space that were added in the 2000s? If the answer is no, as it clearly is, then the retail CRE sector is doomed to implode.

Let's try a second simple question: what's holding the retail CRE sector up? Answer: leases that will soon expire or be voided by insolvency, bankruptcy, etc. as retailers close stores and shutter their businesses.

One last question: who's holding all the immense debt that's piled on top of this soon-to-collapse sector? The domino of retail CRE will not fall in isolation; it will topple the domino of debt next to it, and that will topple the lenders who are bankrupted by the implosion of retail-CRE debt. And once that domino falls, it will take what's left of the nation's illusory financial stability down with it.

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LawsofPhysics's picture

Please, this time is different (at least form the perspective of outstanding debt and CDS).

It's pretty clear that is something "will end badly", TPTB will either be 1) long gone when it "ends" or 2) it won't be allowed to "end".


dick cheneys ghost's picture

''CDS are the foundation of synthetic debt''------trav7777

Seasmoke's picture

How do you have so many old posts. Do you work for NSA??

mmanvil74's picture

Instead of the "Death of Retail" as recent posts on ZH imply, what is really happening is simply the "Evolution Of Retail" in which big box stores are finally succumbing to e-commerce, as anyone could have predicted years ago.  It just took longer for most businesses like Sears, Kmart, etc. to finally go belly up but the writing has been on the wall for a decade or more.

What these "Death of Retail" proponents are not pointing out are stats like these, from Bloomberg:

"Consider Amazon’s center in Chattanooga, Tennessee... the building is part of Amazon’s almost $13.9 billion spending binge on fulfillment expenses -- including 50 new facilities -- since 2010. That’s more than the company spent on warehouses in its lifetime and brought the total to 89 at the end of 2012. Amazon has announced five more in the U.S. this year."  

So these foot traffic stats are misleading because they are no longer a reliable indicator for retail sales.  Certainly, Amazon's efficient style of retail will probably create net job losses in retail, but (hopefully) this will be a good thing, it will force Americans to get real skills if they expect to be employed, rather than just standing in a shopping mall selling junk imported from China.

Also it is true this trend will put pressure on US commercial real estate firms exposed to U.S. retail suburban strip malls, so how do we short this sector?

Handful of Dust's picture

Who is financing this? I mean, I see new small strip malls popping up in every tiny location they can while some just a mile or two away have tons of space with many stores now shut down...empty.

Who's holding all that debt?

Crisismode's picture

What a surprise . . . .


The corporations offshored and outsourced millions of jobs overseas,

The middle class has lost millions of employees earning living-wage salaries,

and replaced them with low-wage part-time jobs . . .

. . . and surprise, surprise . . . . retail sales are dropping like a rock.


Who coulda noed?


johngaltfla's picture

Who's holding all that debt?




Courtesy of the .gov and the Federal Reserve.

Banksters are never allowed to take losses, only the sheep are permitted to take it up the ass in this new improved CRE bubble.

Winston Churchill's picture

Not the point at all.

Its about the huge mal-investment in bricks ,and mortar and who is

on the hook when it implodes.

Never mind the sunk costs in infrastructure ,by state and local

govt., to lure these projects to what will be their final  burial grounds.

As MERS was used in the CMBS transactions , what frauds will come to

light then as well.

Squid-puppets a-go-go's picture

when i was waiting for the first implosion to happen in 2008, my money was on CRE being the catalyst. Resi housing goes down in history as having that dubious honor now, but the losses of CRE dwarf the residential market - and are similarly wrapped up in daisy chain derivatives

Headbanger's picture

You mean "real skills" like hunting and farming and killing neighbors for food??

Do you mooks get the fact that it's all over as far as ANY normal way of life goes now???

And what makes you think even Amazon will survive when the whole system collapses?

So get a clue of what really lies ahead for all of us.  And it isn't pretty!

Parrotile's picture

With 79% of the US Population living in urban areas (58% living in urban areas >200,000 persons) the dependency on reliable services and sanitation is a concern should the other "essential service" - electrical power, fail for any extended period, since New York alone produces nearly 2 million gallons of sewage every day -

We've seen what happens when Public Sanitation infrastructure fails - and in a high population density location, with the added panic arising from other infrastructure failures, (particularly reliable electrical supply), things could become very nasty, very quickly., and !!!


nakki's picture

What could possibly go wrong with a society that produces nothing. Your Amazon analogy proves the opisite point you're trying to make. So everyone works pushing paper or in a warehouse? What skills do you speak of? Something in the trades? Perhaps doctors or lawyers? Bankers, Traders, middle men? Can everyone work on a computer or as ad men, social media experts or talking heads? Since after the dot com bubble the only thing that has proped up our economy was construction. With that gone we are in a bad bad spot. There can only be so many engineers and chemists. We have been on a long slide since we stopped producing anything of value in this country. By the way all that shit that's shipped from those Amazon warehouses is made in China and bought by people with jobs. Lose enough jobs and we'll see how much shit they sell in the future.


X_mloclaM's picture

By the way all that shit that's shipped from those Amazon warehouses is made in China [by people with jobs] and [will only be] bought by people with jobs.

Best of luck to retailers ... specialize?


mpath's picture

"So these foot traffic stats are misleading because they are no longer a reliable indicator for retail sales" 

That is another piece of the puzzel that supports the case to short commercial real estate sectors. But indirectly, the banks holding the loans for all the retail space that was built-will be the ones holding the bag. Of course, that is until they throw it back at us to bail them out again.

Woody Dorsey spoke about the retail stores in a piece he wrote a while ago. I don't have it on hand-but he may have it on his website.


The Old Man's picture

What do they sell in those stores that say "For Lease" Grandpa?

NoDebt's picture

"Our job here is done" say the big-box sweatshops.  All the small businesses have been driven out, never to return.  Now we close the big box stores and everyone goes on the government dole.  Gotcha!

TruthInSunshine's picture

Jimmy: "What do they sell in those stores that say "For Lease" Grandpa?"

Grandpa:  ForAlease-a-Or-a-For-a-Sale-a is a high end, Italian haute couture store, Timmy. You can't even tell what they're selling by looking in the window. They're all over the place. Fastest growing retailer if my eyes don't deceive me...

Jimmy: You're so smart, Grandpa.

Grandpa: Let's go get some ice cream now, Billy.

Cursive's picture


Thanks for the link.  Good read and enjoyed this lulzworthy quote:

Retail consultant Robert Antall, managing partner of Consumer Centric Consulting in Shaker Heights, said that while he couldn't speak to Dots specifically, "The Internet is definitely taking business from traditional brick and mortar retailers like Dots and so are growing competitors."

"Paradoxically as the economy improves, 'value retailers' like Dots do worse as consumers buy more expensive goods," he said. "In retail, those who do not change die a slow death. Retailing is changing very rapidly at the moment and into the foreseeable future. Possibly this may have been the cause."



TruthInSunshine's picture

Dots should remodel their stores to shades of iShit white everything, raise their prices, and embrace the recovery with open arms.



Stoploss's picture

Fourteen years gone, and counting..........

eclectic syncretist's picture

This will really raise the bar for fraud and take "mark-to-fantasy" to a whole new level, and when it all falls apart everyone will ask "where did all the money go?" and those few who know better will be laughed at when they explain "there never was any, it was all just make-believe conceived to enrich a few at great cost to many".

zaphod42's picture

Does it seem like this to you?  Corporatistas manufactured/built homes (using cheap labor), and sold them to workers based on money lent to the workers by the Banksters.  The workers / taxpayers bailed out the Banksters, the workers’ loans were foreclosed and the Banksters purchased the homes for half what the workers paid for them, using the money given them by the government (workers / taxpayers) when their loans failed.  Now they will rent the homes they stole back to the workers for double the rent they could have gotten before the “Great Recession.” 

The workers in turn have had their pay reduced so that the Corporatistas could avoid having to pay benefits – those workers whose jobs have not been terminated.   The Corporatistas are manufacturing goods that they want to sell to the workers of America, whom they have rendered destitute, by having the Banksters loan them the money, no doubt again securitizing the loans so that when they are defaulted upon the government can again bail them out. 

Of course, you must realize by now that the Banksters and Corporatistas are the same people!

Rinse and repeat?  How often can this be done?


El Vaquero's picture


How often can this be done?

Until energy gets so expensive in relation to disposable income that it either precipitates a bigger, meaner financial crisis leading to broken supply chains, or it just outright breaks supply chains. 

LawsofPhysics's picture

Correct, eCONomies are dependent upon confidence.  Once the producers of real products and services of real value figure out they are getting screwed, they can shut things down pretty quickly.  Can be a real bitch if these are the producers of commodities essential for survival.  All the money that has been printed and added to the world's balance sheets is still very fungible.  For the most part it has been "sterilized" to the balance sheets of the world's central banks, but it won't stay as such for too much longer.

El Vaquero's picture

And the scary thing is that it need not push the energy resources to their limits before breakages occur.  Our monetary system, being a ponzi, requires that continued growth.  You merely need to take that growth away to break things.  All the wealth will go to the top of the pyramid before the whole pyramid comes crashing down.  Well, that growth has stopped and we're hearing the giant whooshing sound of all the wealth getting sucked to the top.  Instead of intelligently winding down from the age of oil and adjusting our lifestyles, the buttholes in charge are trying to push onwards with the current way of life.  There are some fun times ahead.  Very fun indeed.


My reccomendation is to become a seed whore and collect as many different varieties of seeds as you can. 

Budbud's picture

I do most of my shopping online.  I LONG for the death of brick and mortar retail.  It'll be grand to see these once arrogant kings kicked out of their castles and left on the sidewalk with a broken crown and an entitlement temper tantrum.  I can't wait to see VAST swaths of this land, once again reclaimed by the nature of its region.  I hate the fact that MOST places I've ever gone to in America, for my entire life, look and feel exactly the same.  BestBuy, Kmart, Wal-Mart, McDonalds etc... Am I in Slidell Louisiana, Houston Texas, Tulsa Oklahoma, Paoli Pennsylvania?  Who knows.  The innate character of most places in America has been wallpapered over buy the same giant, corporate crap brokers and their identical boxes of business.  I've always thought it very ugly and I've worked for these corporate retail giants.  Please sir... let me sign over my entire life for $7 an hour.  No thanks.  Shop from online only retailers and help me hasten the demise of this grotesque and long in the tooth American paradigm.     

kridkrid's picture

In my circle of friends I'm considered pretty gloomy, but I don't think JC Penny's and Sears going under means the end of malls (unfortunately). You wrote, "Once anchor stores like JCP and Sears shut their doors, there won't be a reason to go to the mall for many"- Who are these people? The mall near my house is always busy. I park and walk through Sears because it's always easy. It remains empty while the rest of the mall is packed. Retail in general is clearly fucked. But some are much more fucked than others. The collapse of the debt-based ponzi scheme will take everything down. If not for that however, downsizing of American retail would be just fine.

zaphod42's picture

Without the big retailers to rent the anchor sites, the malls will not be able to provide heat, electric and service to the rest of the shops - shops that in the malls near me turn over relatively quickly. 

It is not a matter of there being people in the mall.  The people need to have money to spend.

The scenario in the lead article is suggested as something the could begin the collapse of the house of cards called the World Economy.  It might start with something else, but that is the closest event to hand, in the opinion of many.


kridkrid's picture

So the anchor stores subsidize the rest the mall? Perhaps my mall is not a good example, as it is doing relatively well, but they could shut off each of the anchor stores and I don't think most people would notice except for maybe nordstroms.

I do agree with your second part however. Something is going to be the card the brings the whole house down, but it's the financial system it gets brought down retail just goes down in it's wake. My point is, not all retail is bad, but the bad stuff definitely should go away.

DrunkMath's picture

I can agree that not all retail is bad, and many of the malls or shopping centers I visit in Arizona are just fine. In fact, many of them don't even have anchor stores. Visit some of the malls where JCP and Sears are shutting down and you'll get a taste of how bad a mall can get.

DrunkMath's picture

I can agree that not all retail is bad, and many of the malls or shopping centers I visit in Arizona are just fine. In fact, many of them don't even have anchor stores. Visit some of the malls where JCP and Sears are shutting down and you'll get a taste of how bad a mall can get.

Ancona's picture

I ain't scared.....Yellen has my back!


Seasmoke's picture

If it didnt happen in 2010. Why would 2014 be any different ??

zaphod42's picture

Added complexity, which is the only thing growing in our economy, IMO, makes the structure more fragile and susceptible to collapse.  It happened in 2008, why not in 2010?  And what makes 2014 special?


Colonel Walter E Kurtz's picture

I can think of about 4 trillion reasons that 2014 is no longer like 2010. The question is how many reasons before we go over the cliff.

ebworthen's picture

Cue Howard Davidowitz!

"Poverty Is America’s 'Only Growth Sector' "

Grande Tetons's picture

Anyone needing to learn how to self induce vomitting is directed to read the following headline.


Kirk2NCC1701's picture

Not what the title companies want to hear.  They are already hurting in the RRE (Residential RE) market.

The Old Man's picture

"One last question: who's holding all the immense debt that's piled on top of this soon-to-collapse sector? The domino of retail CRE will not fall in isolation; it will topple the domino of debt next to it, and that will topple the lenders who are bankrupted by the implosion of retail-CRE debt. And once that domino falls, it will take what's left of the nation's illusory financial stability down with it."

"And the train will finally stop in the wild wilderness with no station in sight."

Be prepared.

stormsailor's picture

i like the ayn rand atlas shrugged reference

grgy's picture

I wish it would just go ahead and happen.  The sooner it does, the better.  Might wake the sheeple up. Then again maybe not.

Rhino's picture

Probably not. it's capitalism's fault you know.

Ban KKiller's picture

You can't make your lease payments? Well....don't leave us please as everyone else will pull out! What can you afford? No more? OK, you have a deal, just stay so we can pretend this mall is viable!

Commercial backed mortgage securities? Worthless!

stormsailor's picture

in the mall where i have an insurance agency location.  target pulled out last year no lease in sight, huge empty box.  toys-r-us pulled out about 18 months back.  empty, no lease in sight.  hobby lobby is pulling out in about 4 months.   and an "ollies" is moving out in july.


i come up for lease renewal in november next year, either they lower it to about 60% of what i'm paying, or they can go to 80% empty in the place.


the management company we have to deal with are absolute douche nozzles anyway, been here 22 years.

wisehiney's picture

Here is a fun one.....
OT Bill Gates: There will be no poor countries by 2035

Sudden Debt's picture

all nuked and depopulated by than...

Steverino's picture

there probably won't be a Bill Gates by 2035 either...