Wednesday, September 13, 2006

Comments on the Market Impact of Wal-Mart at 6th and Wakarusa

Re: Proposed Development of Wal-Mart at 6th Street and Wakarusa Drive
Market Impact Study by Richard Caplan

Sent to the Planning Commissioners:

I have had the opportunity to review the various market impact studies on the Wal-Mart development prepared by Richard Caplan. The studies are flawed, leading to an incorrect conclusion.

Using the data from the Caplan studies and correcting the flaws, it is clear that the retail market of Lawrence cannot absorb the proposed Wal-Mart store and that the development of this store will cause other retail space already located in the market to fail.

1. Growth in the supply of retail space has far outpaced the growth in demand for retail space.

Caplan makes use of sales tax receipts from 1990 through 2005 to proxy demand for retail space. This is a good approach. However, the Caplan report uses the current dollar growth to project growth in demand. This is the same, incorrect, procedure he used in 2003 with his first market analysis.

As I pointed out in 2003, these numbers must be adjusted for inflation in order to estimate growth in retail spending. The applicant admitted to this flaw and withdrew the market analysis. The revised market analysis claims to correct sales tax data for inflation, but this correction is not shown in the data.

When corrected for inflation:

a. From 1990 to 2005, growth in retail spending is only 1.6% per year suggesting that the City should have kept retail space down to that same rate of growth. However, since 1990, the City's retail stock grew by 4.1% per year and by 4.9% per year from 1996 to 2005, far outpacing growth in demand leading to the widespread vacancy that we have today.

b. From 2000 to 2005, retail spending actually fell, indicating that there is no new demand for additional retail space.

2. The rate of population growth has declined.

The Caplan analysis makes extensive use of the Development Strategies Inc. (DSI) study. The DSI study makes use of population growth rates that are higher than Lawrence experienced even when the City was growing at its peak rate of 2.2% per year in the 1980s. DSI offers no justification for this assumption that population growth will be higher in the next decade than it ever has been in the past.

Caplan makes no mention of the Census Bureau's recent report suggesting that the City is now growing at about 0.6 percent per year. This Census figure is corroborated by the declining school enrollment, the high rental vacancy rates, and the declining inflation adjusted retail sales tax receipts.

3. Income growth has slowed corroborating the slow growth in retail spending.

Caplan uses U.S. Department of Commerce data to claim that income grew 14.4% from 2000 to 2004 suggesting that this indicates growing retail demand. What the report fails to state is that this only a 4.4 percent increase after inflation.

The Kansas Department of Labor Employment Survey provides local, thus better, data on income growth. The employment survey finds that wages grew by only 3.4% from 2000 to 2005 after inflation. This wage growth translates into about 0.7% growth in income per year.

Even over a longer period of 1996 to 2005, wages grew by only 1.1% per year. If multiplied by 0.6% growth in population per year, the growth in retail demand is only 1.7% per year. This closely corresponds to the 1.6% per year in real growth in retail spending found in the sales tax data. With either approach retail demand is growing by much less than the growth in retail space. This translates into a need for only about 110,000 square feet per year, if the City was not already overbuilt. This indicates that the City cannot absorb retail space at the rapid pace at which it is now being planned and built.

4. The vacancy rate in the retail market is higher than Caplan and DSI assert.

Caplan makes use of the DSI estimated retail vacancy rate of 3.9%. On a total stock of 6,479,000 square feet, this vacancy rate suggests about 250,000 square feet of vacant space. Simple addition of known, long-term vacant buildings adds to more than 250,000 square feet. For example, the Tanger Mall is 135,000 square feet alone. This indicates that the DSI study did not properly count vacant space and cannot be relied upon for an analysis of the vacancy conditions of the City.

Several conclusions can be made after correcting the flaws found in the Caplan study.

1. The City has permitted developers to build more retail space than the City can absorb. This is hurting existing retail centers. If a second Wal-Mart is built at 6th Street and Wakarusa Drive, this additional retail space will cause a comparable amount of space to go vacant elsewhere in the community, blighting these existing shopping districts.

2. Population growth and income growth has slowed in the community. This necessitates that the community slow the pace of retail expansion in the future so as to not further blight existing shopping districts.

3. The City has already allowed too much space to be built leading to widespread and long-term vacancies. This should cause the City to exercise restraint before permitting any expansion of the already bloated supply of retail space.

Communities throughout the nation have learned to monitor the health of their real estate markets and to plan accordingly. Cities can better achieve their planning goals if they react appropriately to market signals. The Lawrence retail market is dangerously overbuilt and will only become worse if additional space is added to the supply. This leads to the conclusion that a Wal-Mart store should not be developed now at 6th and Wakarusa Drive.

1 comment:

L. Ron Drunkard said...

Just saw your blog for the first time. Excellent! For an economist to not use inflation-adjusted dollars in a study is not an "oversight". It's arguably fraud. I'm newly back to the area and have only heard a little bit about this proposed store. What is Mr. Caplan's relationship to Wal-Mart? Is he a paid consultant of their's or of the City's? If he is being paid by the City I would suggest an investigation into his relationship with Wal-Mart and withhold payment for his "study".

I am continually amazed by the use of this economic sleight of hand and how it so often goes unnoticed. In Sacramento last year, where I was an employee of the State, the governor, and many in the press, began attacking employee pensions. One such example of our pension "largess" was the supposed "million dollar pension" of a secretary that made 36,000/yr for 20 years with the State. In terms of real dollars that pension was really worth about half that (and that didn't even take into account the discount rate of future dollars).