Commercial Service: Retail Properties Are a Source of Concern for CMBS Investors.

On the heels of news about a sharp decline in consumer confidence in January-Reuters reports that the monthly index of consumer confidence slid from 128.6 in December to 114.4 in January-Standard & Poor's has expressed concerns about the prospects for retail-based CMBS for this year.

The year has already gotten off to a bad start for the retail sector in any event, with major retailers such as Montgomery Ward and Bradlees exiting the business and others such as Sears and Office Depot announcing multiple store closings. Peter Kozel, a Standard & Poor's researcher says in a recent report, "Travails of the Retail Property Sector", that "a major retrenchment on the part of consumers is the immediate and primary cause of these developments." Mr. Kozel believes that 2001 will "offer a real test" for the collateral pools of CMBS transactions, about 30%, that are composed of retail properties.

The slowdown in the economy is the primary reason for Mr. Kozel's concern. From the third quarter of 1998 through the third quarter of 2000, retail sales, excluding the automotive sector, increased at an annual compounded rate of 8.2%, he says. During the same time, personal consumption expenditures jumped by 15.6% whereas personal disposable income was up by just 10.7%. This means that people were essentially spending more than they were earning from current activities, he concludes, causing the personal savings rate to fall below zero by the third quarter of 2000. This was possible because "an unprecedented escalation in stock prices and solid gains in home values provided the collateral to facilitate the growth in current consumption at a rate that exceeded the expansion in incomes." Also, increased business activity brought along extra employment gains and ...