Flight to Quality Vs. Flight to Poverty

During tough economic times, the commercial real estate world goes through a process called Flight to Quality.  In commercial real estate, this term references tenants with lease expirations (or those rare ones actually looking to expand in a down market) during such a time period benefiting from rising vacancies in Class A buildings.  When the going gets tough, landlords become more like drug dealers, going to great lengths to retain or attract new customers.  Generally, this is done through offering free rent, lower rental rates, lower rent increases, higher tenant improvement allowances or other concessions.  As in a game of musical chairs, there are not enough seats (tenants) for all the asses (landlords), and some landlords will suffer.  Those will generally be the landlords of older or lower quality buildings, who are not able to compete with trophy buildings at  deflated asking rents. Yet, this only seems to be the case with office buildings.  What about retail properties, and what makes them almost the opposite?

In a poor economy, retail sales are hit extremely hard.  Consumer spending typically falls off the face of the Earth, as it did with the credit crisis.  Generally speaking, one would think that would impact the entire retail sector negatively, but is that really the case?  Almost inversely related to office properties in this regard, in the world of retail, it is the high-end luxury stores that get hit hardest.  The rich may still spend money, but its a lot harder to justify buying that $10,000 Rolex when your business isn’t doing so hot.  Conversely, there are still areas within retail that do okay…in some cases even better during a recession: those retailers that cater either to the cheap, or those who provide basic necessities.

People may clip more coupons during a recession, but they still go grocery shopping.  Maybe mommy and daddy won’t be buying junior that new video game, but they are happy to take him to the dollar store and let him go nuts. More things may be added to the Dollar Menu, but just as many people eat at McDonald’s. And so, it is the owners of shopping strips in lower income, and even poverty stricken areas whose centers are the best occupied (OK, fine.  They might get robbed more often in a crappy economy, but still).

Generally speaking, in the world of retail, as a landlord, your property is only as healthy as its tenants. If you can insulate yourself from the throes of a poor economy by filling your center with stores that thrive on thriftiness, you’ll be in better shape than your high-end counterparts.

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