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For the first time since 2001, another recession year, the Chain Store Age Big Builders Survey shows a decline in new-store growth. Their survey of 25 leading retailers, covering all categories, shows that those retailers estimate that they will open 778 fewer stores in 2008 than they opened last year. Capital spending fell from approximately $42.1 billion in 2007 to $35.9 billion in the estimates for 2008, a 15% decline. The drug store category was not immune to the slowdown, with 772 new stores estimated to open in 2008 compared to 834 last year. Only the supermarket category beat the trend, opening 555 compared to 424 in 2007. The survey was conducted during November, as retailers and retail real estate developers were trying to shake off the cataclysm that struck in October. In the category of general merchandise stores, construction spending was up by one-half of a percent during the one-month period from September 2008 to October 2008.

Copyright Lebhar-Friedman, Inc. Mid-Dec 2008

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For the first time since 2001, another recession year, the Chain Store Age Big Builders Survey shows a decline in new-store growth. Our survey of 25 leading retilers, covering all categories, shows that those retailers estimate that they will open 778 fewer stores in 2008 than they opened last year.

In 2007, the 25 leading retailers opened 4,511 new stores. In 2008, plans call for opening 3,733. The difference of 778 stores translates to a 17% decline.

New square footage brought to market followed along, falling from 143 million new sq. ft. last year to an estimated 126 million sq. ft. this year, a decline of approximately 12%.

Capital spending fell also, from approximately $42.1 billion in 2007 to $35.9 billion in the estimates for 2008, a 15% decline.

The slowdown in expansion affected nearly the entire retail industry. Discount stores went from 1,632 new stores in 2007 to 1,192 stores in 2008.

The drug store category was not immune to the slowdown, with 772 new stores estimated to open in 2008 compared to 834 last year. CVS opened 186 stores in 2008 and 275 in 2007. Walgreens was poised to end 2008 with 550 new stores, compared to 501 last year. New York City regional chain Duane Reade opened 15 stores in 2008, compared to 10 in 2007. Rite Aid followed the pattern of the other categories, cutting its new-store openings virtually in half.

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Only the supermarket category beat the trend, opening 555 compared to 424 in 2007. Aldi went from 50 new stores in 2007 to 100 stores this year. Kroger beat last year's total of 71, with 80 new stores this year. Publix opened 70 stores this year, compared to 44 in 2007. Safeway opened 20 new stores this year compared to 13 last year. Supervalu's total went up to 75 compared to 27 last year. Wal-Mart's Neighborhood Markets added 23 stores this year, vs. 20 in 2007.

But that's it. Beyond the stores that sell necessities grocery stores and drug stores - and the stores that sell at sharp discounts, there are no bright spots.

The Home Depot and Lowe's together opened 161 new stores this year, compared to 263 in 2007. Specialty hard line stores, such as AutoZone, Hibbett Sporting Goods, Michaels and seven others, dropped from 1,100 new stores last year to 961 new stores this year.

The biggest loser: the specialty apparel category, which in our survey included Abercrombie &. Fitch, Brown Shoe, Charming Shoppes, Chico's and six others. The nine retailers in the category opened a total of just 744 stores this year. Last year, they opened 1,159 stores.

The same pattern holds true for capital spending.

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The Truth May Be Worse Yet

Our survey was conducted during November, as retailers and retail real estate developers were trying to shake off the cataclysm that struck in October. Cataclysm? Think about what happened to retail real estate investment trusts (REIT) in October. Through the first nine months of 2008, the FTSE NAREIT Equity REIT Index, which tracks REIT stock performance, showed that retail REIT stocks declined by about 2.5%. People were worried, but then a 2.5% dip wasn't all that bad.

At the end of October, however, retail REIT stocks had declined 40.6% for the year. That's not a misprint. That's what happened in October: Retail REIT stocks moved from 2.5% down for the year to 40.6% down for the year - in 30 days.

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It wasn't a fluke confined to retail real estate, either. Every real estate category took a beating.

Before October, multifamily REIT stocks had risen 17.1% for the year. During October, those stocks fell 27.6% and ended down 10% for the year by the end of the month. Office REIT stocks were down 2% for the year before October and 32.1% for the year after October. Industrial REITs got shellacked. Down 12.5% for the year before October, industrial REIT stocks ended down 62.8% after October. October, of course, also brought major declines to the general stock market.

After all of that carnage, Chain Store Age started the Big Builders Survey. It's important to keep that in mind, because retailers made most of their estimates for the remainder of 2008 based on the slow going of the first three-quarters of the year, not after the October earthquake. In short, when retailers and REITs issue their annual reports covering 2008, the year may look worse than it does now.

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Data on construction spending collected by the U.S. Census Bureau show a pattern similar to the Big Builders Survey's findings, while confirming that October was indeed a game changer. "The Census Bureau numbers suggest that someone slammed on the brakes abruptly," said Kenneth D. Simonson, chief economist with the Arlington, Va.-based Associated General Contractors of America.

The Census Bureau categorizes retailers differently, but the trend is still unmistakable.

In the category of general merchandise stores, construction spending was up by one-half of a percent during the one-month period from September 2008 to October 2008. In short, October this year was a little better than September of this year. But spending for construction by general merchandise retailers in October 2008 plummeted by 29% compared to October 2009. Don't forget, October is when new stores have to come online to catch onto holiday sales. So there should be a lot of spending in October, especially compared to September.

Building-supply stores spent 2.7% more in October 2008 than in September 2008, but 29% less this October compared to last October. A category labeled "other stores" spent 9.7% less from September to October of this year, and 22% less in October 2008 than in October 2007.

Drug stores followed the pattern of most other categories in the Big Builders Survey. Spending on construction rose 9.2% from September to October this year, and fell 4.3% in October 2008 compared to October 2007.

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What specifically happened in October? Who put on the brakes? Everyone. Lenders stopped lending and developers stopped developing.

"Developers either had the credit window slammed on their fingers or were rethinking assumptions about the probable success of a project," Simonson said. "The dismal figures on consumer spending have to lead to a conclusion that a project started today would probably sit around unoccupied."

Simonson went on to say that the consensus outlook among economists calls for further declines through the second quarter of 2009, with a rebound thereafter.

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"There is no agreement about whether the pick-up will be sharp or gradual," he added. "And keep in mind that what has happened to the economy is unprecedented, and I'm not sure that anyone really knows how to forecast a recovery."

Is there any good news?

"The price of materials is dropping," Simonson said. "There are lots of contractors available to execute projects. Anyone with cash will be well-rewarded in terms of lower costs and faster delivery times."

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