How Immigration Reform Could Affect Retail Real Estate

By Elaine Misonzhnik


September 21, 2010

As Arizona’s Senate Bill 1070 (SB 1070) went into effect on July 29, local media outlets predicted Armageddon for the state’s retail businesses. SB 1070, otherwise known as the Support Our Law Enforcement and Safe Neighborhood Act, attempts to discourage unauthorized immigration in a state where immigrants make up 14.3 percent of the population.

Many fear that the bill—which makes it mandatory for Arizona’s foreign-born residents to carry legal documentation at all times, allows police to ask about suspects’ immigration status during arrests and makes it a crime to hide and assist unauthorized immigrants—will result in unfair targeting of Arizona’s Hispanic community.

Hispanics make up 30 percent of the state’s total population and represent a powerful consumer constituency. In the weeks leading up to the bill’s enactment, there were reports of immigrants moving out of Arizona’s residential buildings, and retail businesses facing the prospect of closure because of a drop in demand from Hispanic shoppers. Warnings about shopping centers sitting empty abounded.

To make matters worse, a number of organizations, municipalities and private individuals urged an economic boycott of Arizona, refusing, among other things, to travel to the state.

The truth, however, is that while Arizona’s economy has suffered as a result of the Great Recession, there is little data to suggest direct ties to the passage of SB 1070.

The Great Recession hit Arizona harder than many other regions in the country because of the tremendous amount of over-building that took place there during the housing boom and it has been suffering financially for the past several years.

In July, the state ranked second in the nation in residential foreclosure rates, with one in every 167 homes receiving a foreclosure filing, according to RealtyTrac, an online provider of foreclosure information.

The unemployment rate in Arizona now stands at 9.6 percent, in line with the national figure. From December 2009 through April 2010, long before the new immigration bill was signed into law, retail sales in Arizona dropped 24 percent, to $3.62 billion, according to the University of Arizona. Arizona’s government is so strapped for funds it’s forcing 30,000 state employees to take 12 furlough days during the next two fiscal years.

In other words, the setback the state has seen is purely economic, not political.

Given how badly the state’s economy has been suffering, it makes sense that retail businesses in immigrant-heavy communities are experiencing low demand, says Jose de Jesus Legaspi, president of the Legaspi Co., a Montebello, Calif.-based real estate development and brokerage firm focused on the retail sector. For the past 30 years, Legaspi has specialized in serving Hispanic consumers in urban markets.

When the Pew Hispanic Center, a Washington, D.C.-based non-partisan research organization, measured the unemployment rate among unauthorized immigrant workers in March 2009, it was more than a percentage point higher than the unemployment rate for U.S.-born workers, at 10.4 percent. The unemployment rates for U.S.-born workers and legal immigrants for that month stood at 9.2 percent and 9.1 percent respectively.

“What influences retail sales within any group is economic conditions; if there are no jobs, if there is no income coming into the household or the income is reduced, retail sales fall,” Legaspi says. “And the issue in Arizona regarding retailers who are having a hard time is probably about economic conditions in Arizona.”

An in terms of people fleeing the state, the two biggest factors that determine where immigrants choose to live are job availability and the presence of established family ties, notes Daniel Griswold, director of trade policy studies with the Cato Institute, a Washington, D.C.-based public policy research organization. Given that Arizona has one of the largest Hispanic communities in the country, it’s unlikely they will start moving to other states just because of the new immigration law.

Potential effects

In fact, many economists say that immigration reform, whether on the state or federal level, will do little to impact migration patterns or retail sales in the U.S., at least in the near term. While a good case has been made that providing unauthorized immigrants with an easier path to legal status might have a positive effect on the U.S. economy overall, the effects on the immigrant community itself are likely to be minimal.

To begin with, the new laws will target only a fraction of the country’s 39 million immigrants, the majority of whom already hold legal status. The political situation in the U.S. today makes it unlikely that any reform passed on the federal level will have a wide scope, if it gets passed at all, says Madeleine Sumption, policy analyst with the Migration Policy Institute (MPI), a Washington, D.C.-based independent, non-profit think tank.

Of the approximately 11 million illegal immigrants already in the U.S., it will affect, at most, several million people. And given the low level of education among unauthorized immigrants, it’s unclear whether the reform will have any substantial impact on their income levels.

Legal status might make it easier for them to find work. But an increase in income would be tied to greater investment in secondary education and the development of English language skills, rather than directly to the change in immigration status, Sumption notes.

Approximately 47 percent of illegal immigrants between the ages of 25 and 64 lack a high school diploma, according to the Pew Research Center, an independent, non-partisan research organization based in Washington, D.C. That compares to 8 percent of U.S.-born residents in the same age group.

Nor is immigration reform likely to significantly influence the number of new immigrants entering the country on an annual basis. “While [law] enforcement clearly plays a role in illegal migration patterns, the variation in illegal immigration over time is largely a response to changes in the U.S. macro-economy, as well as the economies of migrants’ home countries,” writes Gordon H. Hanson, professor of economics at the University of California-San Diego and a research associate with the National Bureau of Economic Research. “Over the last two decades, the inflow of unauthorized immigrants has broadly tracked economic performance.”

From 2000 to 2004, the inflow of unauthorized immigrants into U.S. averaged 800,000 people a year, according to the Pew Hispanic Center. In contrast, in 2008 and 2009, about 300,000 unauthorized immigrants entered the country. Overall, the total number of unauthorized immigrants in the U.S. fell by 10 percent in the past three years, to 11.1 million today from the peak of 12.4 million in 2007.

On the agenda

Immigration has become a hot topic issue this year as state and federal officials began addressing lax border security and the widespread practice of tolerating unauthorized entry. Arizona has enacted the strongest response to this in the form of SB 1070.

But the passage of SB 1070 has sparked heated opposition both inside and outside the state, including legal challenges filed with federal courts and business boycotts. Many cities, organizations, entertainers and private citizens have vowed not to spend money in the state, including foregoing travel to Arizona, not holding concerts and conventions there and not patronizing Arizona-based companies that have failed to oppose the law. No hard figures exist, however, to measure the boycott’s impact so far.

Meanwhile, states currently considering laws similar to Arizona’s include Florida, Texas, Georgia, Ohio, Utah and Maryland.

The Obama administration has also made comprehensive immigration reform a part of its agenda. The Comprehensive Immigration Reform for America’s Security and Prosperity Act of 2009, or H.R. 4321, was introduced to Congress in December of 2009. In addition to increasing border security and requiring employers to check the immigration status of new hires, the bill would increase the number of temporary visas available for low-skilled immigrant workers and provide a path to legalization for the unauthorized immigrants already in the U.S.

But while such measures would make it possible for a high percentage of unauthorized immigrants in this country to apply for legal status, the fate of H.R. 4321 remains dubious, Sumption notes.

In recent years, proposed immigration legislation has been routinely stalled in Congress. The idea that unauthorized immigrants could gain legal standing in spite of breaking the law has sparked a heated reaction from immigration opponents. Senate Majority Leader Harry Reid has promised to bring H.R. 4321 before Senate several times already, to no avail. Plus, in an election year, the bill’s fate could be more uncertain than ever.

A piece of immigration legislation that might have a better chance of being enacted, according to Sumption, is the Development, Relief, and Education for Alien Minors (DREAM) Act.

The DREAM Act would provide the path to permanent legal status for unauthorized immigrants under 35 if they arrived in the U.S. before they turned 16, have lived here for at least five years and received a high school diploma.

Roughly 726,000 unauthorized immigrants would become eligible for the benefits of the DREAM Act if passed, according to MPI’s National Center on Immigrant Integration Policy. Another 934,000 would become eligible as they turn 18. But based on historical trends, MPI estimates that only 825,000 immigrants would actually take advantage of the legislation.

Immigrant snapshot

Even if a comprehensive reform package is enacted, however, economists doubt it would significantly impact migration patterns or the spending power of unauthorized immigrants once they gain legal status. The estimated increase in incomes resulting from such reform ranges from zero to 20 percent. In Sumption’s view, if incomes do rise, it would be by at most 10 percent. After the federal government’s Immigration Reform and Control Act of 1986 made it possible for unauthorized immigrants in the U.S. to get amnesty, those who took advantage of legalization saw their wages go up anywhere from 5 percent to 15 percent. The figure was most likely in the single digits, according to B. Lindsay Lowell, director of policy studies with the Institute for the Study of International Migration at Georgetown University.

That’s because unlike immigrants who enter U.S. legally, unauthorized immigrants tend to have a much lower education level, which limits their earning potential regardless of their legal status.

Today, there are approximately 39.4 million immigrants living in the United States. Of that number, 28 million, or 72 percent, are here legally, including 36 percent who have already become naturalized U.S. citizens, the Pew Research Center reports. Immigration reform will not directly affect them.

Approximately 11.1 million immigrants lack legal status. Together, they represent only a tiny fraction of the total U.S. population—3.7 percent. The majority (6.7 million, or 60 percent) are of Mexican descent, followed by natives of other Latin American countries (20 percent) and South and East Asia (11 percent).

Approximately 11.1 million immigrants lack legal status. Together, they represent only a tiny fraction of the total U.S. population—3.7 percent. The majority (6.7 million, or 60 percent) are of Mexican descent, followed by natives of other Latin American countries (20 percent) and South and East Asia (11 percent).

While immigration is seen as a nationwide problem, illegal immigrant workers are concentrated in six states. These include California, New York, Florida, Texas, New Jersey and Illinois, according to the Immigration Policy Center, the research arm of the American Immigration Council, a non-profit charitable organization.

Since those states have historically offered unauthorized immigrants the best job opportunities and already have large immigrant communities in place, tougher local immigration laws will do little to change migration patterns, notes Griswold, of the Cato Institute.

New immigrants might be reluctant to move into states where they will stand out from the masses and where immigration laws are tough because they will fear persecution, Legaspi adds. But if they already reside in a state with a vast immigrant population, they will simply adjust their daily habits to minimize exposure.

“People are talking about a mass exodus from Arizona, but that’s just one state and I think there is been more smoke than fire” there, says David J. Lynn, managing director of research and investment strategy with ING Clarion. “Deporting a person here and there is doable, but deporting a huge population would not be.”

Meanwhile, the socio-demographic profile of unauthorized immigrants suggests it would be tough for them to reap significant economic benefits even if they were provided with a path to legalization. Approximately 29 percent lack a ninth-grade education. Only 15 percent have a college education, compared to 32 percent for U.S. born citizens and 35 percent for legal immigrants, the Pew Research Center reports.

The picture is even bleaker for unauthorized immigrants from Mexico, who make up the vast majority of all unauthorized immigrants in the U.S.—a full 61 percent never finished high school. Only 5 percent have a bachelor’s degree, compared to 30 percent of U.S.–born residents and 38 percent of foreign-born residents from countries other than Mexico.

In spite of having more workers per household than the average U.S. family, unauthorized immigrants have a median household income of only $36,000 a year, compared to $50,000 a year for U.S.-born residents. Moreover, their incomes do not appear to rise with the length of time they spend in the United States. The average household income of legal immigrants who have lived in the country for 10 years jumps 30 percent, to $54,100 a year. The average household income of illegal immigrants who have been in the country the same length of time goes up only 8.6 percent, to $38,000 a year.

That’s largely a function of the limited professional opportunities available to them. Approximately two-thirds of unauthorized immigrants work in the services sector, in construction and in production and installation. Only 10 percent of unauthorized immigrants work in education/health services, finance, information and public administration. That compares to 37 percent of U.S.-born residents, according to the Pew Research Center.

That’s largely a function of the limited professional opportunities available to them. Approximately two-thirds of unauthorized immigrants work in the services sector, in construction and in production and installation. Only 10 percent of unauthorized immigrants work in education/health services, finance, information and public administration. That compares to 37 percent of U.S.-born residents, according to the Pew Research Center.

“The effects of legalization are likely to be more pronounced for those who are already able to move into more skilled work,” Sumption says. “We probably will not see a dramatic increase [in incomes] for people with low skill levels and poor English. But over time, it can give people an incentive to get an education and learn English because they know they can stay for a long time.”

Immigrants who are granted legal status would be more likely to invest in big-ticket items, including home purchases, cars, furniture and home appliances, Sumption adds. But the impact of unauthorized immigrants on U.S. economy overall is negligible, representing a net gain equal to roughly 0.03 percent of national GDP, according to Hanson.

“Allowing a few more or a few less unauthorized immigrants into the country would hot have dire consequences,” he writes.

So what effect would immigration reform have on the retail sector? Likely, very limited, says Deborah J.C. Brosdahl, associate professor and director of graduate studies at the department of retailing at the University of South Carolina. An amnesty program on the federal level would make it more feasible for unauthorized immigrants to gain higher income jobs and would result in them sending less money abroad and spending more of it in the United States. Currently, unauthorized immigrants send approximately $20 billion a year to Latin America alone, according to the Cato Institute. If they feel that they can stay in the country as long as they like, they might instead put that money toward homeownership or invest in cars and other durable goods. But in the context of a $14 trillion U.S. economy, even if that money stays in the U.S., it would be “a drop in the bucket,” says Griswald.

When it comes to tougher immigration laws on the state level, since mass deportations or large-scale movement out of the country remain unlikely, unauthorized immigrants will be left with the same spending capacity and need for goods and services they’ve always had. “There is not going to be a huge economic impact in my mind,” says Lynn.

In states where immigration laws are tougher, like Arizona, they might prefer to pass shopping duties off to relatives with legal status. But they will still shop.

“They’ll become a little less visible in public, so [new laws] might affect pockets of high-concentration areas of unauthorized immigrants,” Brosdahl says. “But other than that, I don’t really think it’s going to affect retail a whole lot.”

In recent years many states with large immigrant populations have seen an increase in the number of malls and shopping centers that cater specifically to ethnic consumers. Examples include the 936,126-square-foot South Bay Pavilion in Carson, Calif. and 214,400-square-foot Mesa Ranch Plaza in Mesa, Ariz., both of which cater to Hispanics, and the 60,000-square-foot Chinatown Square in Atlanta, which targets Asians. One of the worries in Arizona is that the centers that cater to Hispanics will be hit particularly hard by SB 1070 because local police may use them as hunting grounds for unauthorized immigrants.

If that turns out to be the case, unauthorized immigrants might be less inclined to visit those centers and risk a run-in with the police, Legaspi says. But since centers that are created to serve specific ethnic groups are usually positioned in neighborhoods with large immigrant populations, shopping tasks will simply be delegated to friends or relatives who hold legal status.

“All it does is create pent-up demand for needs and services—if they don’t buy something that day, they’ll buy it the following day,” he says. “Is it driving away the consumer from a particular city or state? I think the numbers are insignificant. And if they are there … they need to buy whatever for their day-to-day needs.”

Retailers that cater to ethnic shoppers appear to hold the same view. In spite of the threat of tougher immigration laws in Florida, chains that serve Hispanic shoppers continue their expansion campaigns. Sedano’s Supermarkets opened at least three new stores in Florida since the beginning of the year.

Legaspi adds that the same rules that have always applied to successful retail ventures will determine the success of stores and shopping centers in immigrant-heavy communities. You have to adjust your tenant selection to fit your customers’ preferences. You have to have an anchor. And you should avoid going into areas with a lot of competition, particularly if that involves a much larger and better merchandized center.

Legaspi mentions Georgia as an example. The state, which has an unauthorized immigrant population of 475,000, passed one of the nation’s toughest anti-immigration laws in 2006. It prohibits businesses from deducting labor costs associated with undocumented workers, requires citizenship verification for state employees, employees of businesses with state contracts and residents over 18 requiring public services and imposes a 6 percent withholding tax on 1099-form filers who cannot provide a taxpayer ID number.

Yet Legaspi’s 346,000-square-foot Plaza Fiesta shopping center in Atlanta, located in a trade area where 47 percent of consumers are Hispanic, continues to do well. Today, the center, anchored by a Marshalls and a Burlington Coat Factory, is 99 percent leased. The average retail vacancy rate in Atlanta is expected to reach 12.7 percent by year-end, according to Marcus & Millichap Real Estate Investment Services.

“Georgia has probably as strong an anti-immigrant feeling as Arizona, but a lot of the malls and shopping centers that cater specifically to the Hispanic base have not really suffered,” Legaspi says. “It’s a matter of competition and market forces, rather than legal quandaries. Only those centers that are strong enough, well-located and have the right tenancies will survive.”

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