Some pension executives and investment managers have a huge stake in the holiday shopping season that began last week on the day after Thanksgiving.
A good season is particularly important to the Teachers Insurance Annuity Association-College Retirement Equities Fund, New York. It owns 55% of the largest shopping mall in the United States - the Bloomington, Minn.-based Mall of America, with 2.3 million square feet of retail space.
Plus, TIAA-CREF executives have had discussions over the past few months with several entities about buying the organization's estimated 55% stake in the $600 million mall.
A good holiday season is also important to the New York State Common Retirement Fund, Albany, which is a 50% owner, with an investment of about $265 million, of a portfolio of 26 regional malls, along with General Growth Properties, a Chicago-based regional shopping mall real estate investment trust.
Indeed, since retailers do about 40% of their yearly sales between Thanksgiving and Christmas, a good showing is important to the institutions with direct investments in retail properties and those that invest in the stocks of retailers and retail REITs.
"We believe that sales will continue to be strong (at the Mall of America) this Christmas," said Reggie Long, associate director of the $213 billion TIAA-CREF, who oversees the mall investment. Predictions of just how good this selling season will be vary among analysts, with the majority estimating about a 4% to 5% increase in same-store sales (sales in stores open at least a year, the main measure of how well a retailer is doing).
Richard Sokolov, president and chief operating officer of Indianapolis-based Simon Property Group, the largest U.S. regional shopping mall REIT, had predicted in early November that there would be only a 1% to 2% increase in holiday retail sales.
Now, however, his outlook has changed.
OUTLOOK IMPROVES
"With consumer confidence up and the stock market coming back, my sense now is it's going to be a more robust Christmas," he said. "We're really bullish and think the (same-store) sales increases will be in the 4% to 5% range."
Simon manages and is a co-owner of Mall of America and manages other shopping mall properties owned by pension funds - including the New York State Teachers' Retirement System, Albany, and the Illinois State Teachers Retirement System, Springfield.
Abbott Davis, real estate investment officer of NYSTERS, said, "We think this Christmas season will be a little above average, which should make this a very successful year. All of our shopping centers . . . have done well this year. They've shown increases in occupancy and average rental rates."
Kurt Barnard, president of the Barnard Retail Trend Report, Upper Montclair, N.J., predicts a sales increase of 4% to 5%. "We expect a decent holiday for most retailers, with the lion's share of sales going to the discount stores, which sell off-price merchandise," he said.
Mr. Barnard also expects products for the home, including "everything from shower curtains, to door knobs, to CD players and furniture" to be the big sellers this Christmas. This will come at the expense of apparel sales, which he predicts will sag.
"Designer clothes have lost some of their luster," he said.
Stores at the high-priced end of the market also could suffer this Christmas, Mr. Barnard said. Stores such as Gucci, Neiman Marcus, Saks Fifth Avenue and Tiffany "are heavily dependent on the wealth effect of Wall Street," he said.
Even though the stock market has come back of late, year-end bonuses are expected to be much smaller, cutting into Wall Street employees' ability to spend. Moreover, these stores also get much of their sales from the Far East, and those countries have had extensive economic problems this year, he said.
STOCKS TO WATCH
Following his reasoning, the best retail stock investments for the coming year will include Wal-Mart Stores Inc., Kmart Corp. and Home Depot Inc., which "is going gangbusters," Mr. Barnard said.
Indeed, same-store sales gains in the home improvement category, dominated by Home Depot, Atlanta, and Lowe's Improvement Centers, North Wilkesboro, N.C., have averaged about 15% in 1998, according to Andrew Jones, retail REIT analyst at Morgan Stanley Dean Witter & Co., New York.
Among the real estate stocks Mr. Jones likes are Simon Property Group, General Growth, Developers Diversified Realty Corp. and JDN Realty, a Wal-Mart developer.
L. Wayne Hood, retail analyst at Prudential Securities, New York, predicts a 4% same store sales increase for the Christmas season. Discount stores will be the stronger performers, with sales increases in the 5% to 6% range, while department stores should register sales gains in the "low single digits," Mr. Hood said.
However, he disagreed with Mr. Barnard about the high-end retailers, which, he said, "aren't hurting as much as people expected."
Saks is "doing reasonably well," although Tiffany "has been hurt a little, but it's not too bad," he said.
A 3% same-store sales increase is predicted by Craig Schmidt, a retail REIT analyst at Merrill Lynch, New York. "We think the world's troubles will get visited on consumers," he said.
Warm weather in much of the country has also hurt sales of winter goods, he added.
"Wal-Mart and Target Stores have been doing better, and the traditional retailers have not done as well," said Mr. Schmidt, agreeing with the consensus.
A NICE THING
But whatever happens to retail sales this Christmas, he doesn't think it will have a big effect on retail REITs.
"The nice thing with retail real estate is that they have long-term leases," he said. "I don't see a sharp increase in bankruptcies and that's what would hurt the center owners.
"Retailers may be having tougher times, but it won't reach the (retail) REITs yet. Give me five quarters in a row of a (sales) downturn and then it will affect retail real estate leasing."
Stronger sales by stores such as Wal-Mart and Target will boost owners of retail "power" centers, which are usually anchored by a large discounter, with a group of smaller stores also included.
Developers Diversified, Cleveland, is one of the large owners of power centers and community centers, which are generally anchored by grocery stores and small stores that carry consumer "necessities." It has joint ventures with several large institutional investors, including Newark, N.J.-based Prudential Real Estate Investors, which invested more than $200 million in a joint venture deal with DDR earlier this year. And the Ohio State Teachers' Retirement System, Columbus, was a coinvestor with DDR in the $405 million purchase of the community shopping center division of Homart Development Co. in 1995.
The Mills Corp., Arlington, Va., is another retail REIT expected to do well even if retail sales aren't very strong, said William Acheson, retail REIT analyst at Salomon Smith Barney, New York. Mills specializes in what are known as "value-oriented megamalls," which include the off-price divisions of high-end retailers and discount outlet stores of well-known designers.
As for the Internet, Mr. Barnard acknowledges Americans are doing more shopping on-line. But, he believes that trend won't have a major effect on retail sales in shopping centers for quite some time.
"For the time being it is a minuscule part of total (retail) sales.
"Once technology improves and Americans become more accustomed to shopping via their computers, it will be a factor."
But not for a long time, he said.
