Many young folks interested in improving connectivity between metropolitan regions wonder whether high-speed trains might be the answer.  Unfortunately, fast trains are unlikely to be the solution. Here is what I wrote to a student who asked about the feasibility of high-speed rail.

High-speed rail may make sense in the northeast corridor of the USA, but not elsewhere. The challenge is having enough density of origins and destinations. You need both, just like with urban transit.

A good portion of this travel market is price sensitive. This is why the new, inexpensive, bus operators are seeing strong demand for medium distance inter-city travel.

Essentially, high-speed rail is a high-cost service that only a small percentage of the market can afford. You need a large higher density corridor for that relatively small niche that can afford it to amount to enough demand to make high-speed rail work.

The U.S. Government jobs report released on June 7, 2013, was relatively positive.  The domestic economy added an estimated 175,000 jobs in May 2013.  While the jobs report showed positive progress, it reflects a labor market that continues to be relatively weak as we approach the fourth anniversary of the formal end of the Great Recession–a period that I am beginning to think of as the Long Reset.

Bill McBride of Calculated Risk updates the following chart every month.  It shows how we are progressing in the recovery from the Great Recession as compared to the ten other economic downturns we have experienced since the end of World War II.  This most recent job recovery is clearly the weakest experienced during more than fifty years.

For those interested in housing, the Coomunity Development Department of the Federal Reserve Bank of Minneapolis has established a website designed to convey information about housing and mortgage trends.  The chart below is just one example of the information that is available.

Monthly Average (Mean) of Borrowers’ Credit Scores at the Time of Origination

This chart from RCLCo offers a concise summary of where real estate has been in the USA over the past few years–and where it might be headed. Of course, local market conditions and property specific circumstances can vary considerably.  The RCLCo outlook for 2013 is available here.

As of December 2012, the United States was three and a half years into a recovery from its worst economic downturn since the Great Depression. Yet many retail centers continue to experience difficulty attracting sustainable tenancies and we are seeing more and more vacant big box stores (RREEF – 2012).  The reason is that, overall, we have more retail space than we can sustain.

A look at the change in shopping center space statistics over the past several decades suggests that we have been on a building binge of massive proportion.  As of the mid 1980s, there were approximately 15 square feet GLA (gross leasable area) of formal shopping center space per capita across the country (Serwer 2003). Since then, shopping center space, which accounts for about half of all retail space, has expanded four times faster than population growth.  By 2010, we had about 24 square feet of shopping center space for every man, woman and child in the United States (McKinsey – 2010)!

A strengthening economy is unlikely to solve the problem of over supply of shopping center space.  In fact, overall demand for retail stores is likely to shrink in coming years due to several factors:

• slower growth in household incomes
• a higher propensity to save due to continuing uncertainties about housing equities and pension plans
• migration of some retail sales to the Internet.

Several years ago, analysts at RREEF pointed out that even during the massive expansion of shopping centers between the early 1980s and the onset of the Great Recession, retail spending generally grew more slowly than gross domestic product (GDP) (RREEF 2009).  

Perhaps even more significant, retail spending is not, and has not been, the major factor in the growth of the consumer sector. As the RREEF analysts point out, retail’s share of consumer outlays actually peaked more than sixty years ago–shortly after the end of World War II.  We tend to forget that the consumer sector also includes items such as rent, medical care and travel.  And the largest consumer growth category has been healthcare, which increased from only 3% to almost 18% of household expenditures between 1945 and 2008 (RREEF 2009. p. 4).  So far, there is no evidence that this long-term rise in healthcare expenditures will abate.

More than any other factor, population growth will support the absorption of space in retail centers.  As of 2012, the US Bureau of the Census bureau forecast the population of the United States to grow from about 315 million at the beginning of 2013 to 400 million in 2051—an increase of 33% over this 48-year period (U.S. Bureau of the Census 2012).  If we added no more shopping center space beyond what we have now, this population growth would bring the amount of shopping center space down to a more sustainable ratio—about 17 square feet per capita—two square feet above where we were as of the mid 1980s.

But not all regions of the nation will grow equally. And the regions that have grown most rapidly tend to be those that have seen outsized growth in retail space.  The simple fact is that under any economic and demographic scenario we have more shopping center space than we need.  The next post will examine this challenge in greater detail and explore ways that we can turn this problem into an opportunity to create vital new neighborhoods.

References

•  McKinsey and Company (2010). The Next Wave of M&A in US   Retail. New York, NY: Mauricio Jaramillo, Ian MacKenzie, Chris Meyer, Steve Noble, Todd Yost. Retrieved from http://www.mckinsey.com/Search.aspx?q=next%20wave%20of%20m%20a%20in%20us%20retail
• RREEF (2009). Done Shopping – Structural Shifts in the US Retail Sector and Their Implications for Real Estate Investment. San Francisco, CA: Andrew J. Nelson, Alex Symes. Retrieved from http://www.squarefeetblog.com/commericialrealestateblog/2009/06/10/done-shopping-rreff-on-retail-real-estate-investing/
• RREEF (2012). E-Commerce and Retail Property Markets:  (When) Should We Panic? San Francisco, CA:  Andrew J. Nelson. Retrieved from http://www.rreef.com/content/_media/Research_RREEF_Real_Estate_Bricks_and_Clicks_July2012.pdf
• Serwer, Andy (2003). The Malling of America Unabated—And Frenzied Growth in Retail Space is a Trend That Might End Badly. Fortune Magazine. Retrieved from http://money.cnn.com/magazines/fortune/fortune_archive/2003/10/13/350907/index.htm
• U.S. Bureau of the Census. (2012). U.S. Census Bureau Projections Show a Slower Growing , Older, More Diverse Nation a Half Century from Now. Washington, DC: US Bureau of the Census. Retrieved from http://www.census.gov/newsroom/releases/archives/population/cb12-243.html

Joe Wiesenthal reported on November 19, 2012, at Business Insider  that the big economic datapoint of the day is homebuilder sentiment. This National Association of Homebuilders (NAHB) index is at its highest level since 2006. The chart below compares the NAHB Hombebuilder Sentiment index with the share of gross development product (GDP) attributed residential construction (with a 12-month lag). This surge in positive sentiment could foreshadow a significant increase in economic activity n the USA.

Steve Felix is a weekly blogger on institutional real estate and other topics.  He has a knack for finding and distilling important information.  On November 30, 2012, he posted information on real estate capitalization rates that he gleaned from a recent report prepared by the folks at Real Capital Analytics.  Here is what he had to say:

• Hotels:  Nationwide, cap rates for hotels have remained relatively flat in 2012 at an average of 7.7%.
• Apartments:  The capital shift to higher yielding markets has caused national cap rates to rise in the mid/high-rise sector, although average yields for garden properties have held firm and changed little over the past six months.
• Retail:  While average cap rates on strip centers have fallen to 7.6% nationally, properties with the right anchor and location can command well below that.
• Industrial:  Nationally cap rates continue to witness compression and, at an average of 7.6%, have reached lows not seen since late 2008.
• Office:  Average cap rates nationally, on CBD (Central Business District) acquisitions, have risen since Q1’12 with fewer trophy sales to pull down the average and more secondary market sales that push the average up.

On August 22, 2012, 26 undergraduate students began work toward a Bachelor of Science in Urban Studies at Cornell University. These fourteen women and twelve men hail from Asia, North America and South America.