By Garrick Brown, Vice President of Retail Research, Americas
… if there are some people in our world who continually get it wrong, I can tell you of a number of them in the CRE world who continually get it right. Let me tell you the trick of being good at what I do. It’s not to try to be an expert at everything. The field of commercial real estate itself is too large for anyone to master more than a few sectors at most and then there is the additional issue of geographies. Throw in the importance of being able to track macroeconomic trends and the big picture economy to boot and we are talking about an impossible task for any single person. No, the way to be good at this is to become the expert at knowing who the experts are. I’m not going to try to be the expert on Cincinnati retail space—I know who he is and I listen to him. And so on…
Now this newsletter goes out to a pretty sophisticated mailing list, so a lot of you already know and listen to these guys… but most of you who do likely come from the capital markets, institutional or Wall Street side of things. If you’re involved in local leasing or a smaller, private retailer you may not have ever heard of whom I am talking about but I guarantee you that you probably have been impacted by them in one way or another. I’m talking about my friends over at Green Street Advisors. They’re an advisory and consulting firm out of Manhattan that I would classify as one of the best when it comes to tracking REITs. When it comes to institutional real estate and Wall Street, they kind of remind me of those old E.F. Hutton commercials again. When they talk… people listen. And they act.
And Green Street did talk this week. They released a neweport that determined that for department stores to return to 2006 levels of sales productivity that the segment would basically have to close about 20% of all of the current anchor space of U.S. malls. The Wall Street Journal covered this report earlier this week and my phone has been ringing off the hook since. This is not exactly shocking news to those of us who have been watching the evolution of e-commerce and omni-channel retail and it actually aligns with everything I have been hearing from most of the retailers themselves as well as from the data.
For example, while retail employment in the aggregate is up 378,000 jobs from a year ago, department store employment is down 15,000 positions during that same time (by the way, those numbers do not include Food Service and Drinking Places… they added another 375,000 jobs but technically fall under the Leisure and Hospitality sector). If you have been reading my work, you know that retail closures this year are now at the highest level that we have tracked since 2010 when the economy was just barely beginning to pull out of the Great Recession.
But while those annual retail job numbers are up, MarketWatch released a report earlier this week that found that retail layoffs in 2016 could be the highest since 2010. All of this is pretty scary stuff if you are a landlord. If I didn’t have it in the proper context myself, I would probably jump out the window. Granted, it would be out the window of my home office which is on the first floor.
Here’s the deal… Green Street, I believe nailed it. The challenge with a player like Green Street putting these findings out there is that any of us in the business worth our salt already kind of knew this in our gut or in our own internal, fact-supported work. The thing is… this process of closing stores and right-sizing for e-commerce has been going on for years already and just keeps escalating. The thing to watch is this… Wall Street listens to Green Street. We just may see increased pressure from Wall Street interests on all of the publicly traded department store chains to ramp up their closures. It’s too soon to tell if that will happen, but it is a real possibility. And that is critical because when it comes to the overall health of the retail real estate market, timing is everything. I am a firm believer that we were going to see 20% to 30% of these stores going away eventually already… but likely on a ten-year timetable that would give the market time to adjust and absorb this space. We’ve already been going through this process for about four years now. And guess what? The market has basically been adjusting and absorbing this space.
We just released our Cushman & Wakefield Q1 2016 U.S. National Shopping Center Report last week. At the end of the first quarter, U.S. shopping center vacancy stood at 7.9%. Though actual availability fell in Q1, this decline was not enough to impact the overall vacancy rate. But, despite closures being at the highest level in six years and the fact that retail bankruptcies are up as well, these numbers basically held. Q1 2016 was the 16th consecutive quarter in which overall shopping center vacancy either remained steady or declined. One year ago this metric was 8.3%. Now it is true that this quarter’s overall occupancy growth of just under 4.8 million square feet (MSF) of space represents the smallest increase in occupancy in four years… BUT IT WAS POSITIVE.
Now these numbers do not include super regional malls; our shopping center tracking includes community/neighborhood, power/regional, unanchored strip and lifestyle centers. But our friends at the Costar Group do track the mall sector and according to their Q1 2016 U.S. National Retail Report, mall vacancy is now at 5.3%. This is up from a low of 3.2% at the peak of the last cycle in 2007… but that 5.3% number actually has remained stable the last three quarters. A year ago mall vacancy was 5.4%. Two years ago it was 5.2%. It’s been inching up, but just barely.
While we have seen contraction from a few key retail sectors, others (primarily those that don’t compete online or the discount/off-price sector) have stepped up to fill that void. This is what explains those job statistics I shared earlier. Sure the department store jobs are being cut. But those 378,000 other new retail jobs are positions at Ross, Marshall’s, Family Dollar, Whole Foods, Aldi, Advance Auto Parts, Alamo Drafthouse, etc. And, again, this doesn’t even get into the explosion of restaurant and food related (but non-grocery) growth.
So the news for landlords isn’t as bad as it sounds. So far, the market has found ways to backfill those anchor vacancies. Whether it has been plugging in a Primark or other retailers not traditionally associated with malls (Target, Walmart, Costco, etc.) or dividing space (there are a number of Sears availabilities out there right now that are divisible), or even through creative adaptation (vacant J.C. Penney? Plug in a community college satellite campus like they did at a shopping center in Austin).
But… if that timetable speeds up (and I think we are going to see increased pressure from Wall Street on the publicly traded department store chains to speed up that time table)… well, let’s just say that the mall world may suddenly resemble a python trying to swallow a mongoose. The python will do it… it’s just that it will take time, look ugly and I am guessing give the python a serious case of indigestion in the process.
This post is commentary from the latest weekly edition of our Cushman & Wakefield Retail Newsline, which you can subscribe to for free by e-mailing email@example.com.
Garrick serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.