By Garrick Brown, Vice President of Retail Research, Americas
If you missed it, this past week I gave a webinar on the topic of this current wave of retail closures… which has increasingly earned the moniker in the press of the “retail apocalypse.”
Hyperbole? Well, just a tad considering that the actual definition of apocalypse is the end of the world. But rather than repeat myself, instead I am sharing here a link where you can listen to the webinar as I walk through what is actually happening.
The long and the short of it is we have a retail world where some sectors are facing steep challenges but not all of them by any stretch. Which brings me to the question I was asked by a reporter the other day, “is the retail apocalypse being overblown?”
No doubt, this year we will see a record number of closures. The highest number of closures from major chains we have on record was 7,000 in 2008. Heading into this year, I had initially forecast 5,000 closures. This would have been a 25% jump over last years’ 4,000 closures. This number was far too low on my part. We are just heading into May and I already have tracked 3,500 closure announcements. The addition of Payless to the list of bankrupt retailers added 400 units to those closure lists immediately, but if Payless isn’t rescued out of BK… all 4,400 units are going down. Which is why I am revising upward my prediction for the year. The sad reality is that the chances of retailers emerging from bankruptcy nowadays are slim. And so I am revising my forecast to 9,000 closures for the year. In other words, a 125% increase over last year.
And so, yes, the news from some quarters is fairly bleak. Among the chains to have already declared bankruptcy this year are Wet Seal, The Limited, MC Sports, Bob’s Sporting Goods/Eastern Mountain Sports, BCBG Max Azria, Marbles: The Brain Store, Vanity, HH Gregg, General Wireless/RadioShack, Gordman’s, Gander Mountain and Payless ShoeSource. And, as this report went to press, Gymboree, rue21 and bebe all were reportedly near filing while most major credit analysis firms had retailers like Sears, Perfumania, Destination XL, Tailored Brands, Marsh, David’s Bridal, Nine West, Claire’s and others on their watch lists. Meanwhile, heightened levels of store closures have continued to come from players like Abercrombie & Fitch, Gamestop, GNC, JC Penney, Kohl’s, Macy’s, Staples, Office Depot and others. It’s no wonder that both the mainstream media and business trades alike have been dominated by bleak headlines and an increasing sense of doom about the retail sector.
Yet, if you look at non-mall shopping center vacancy in the United States, it actually hasn’t seen any great spikes. In fact, as of the close of Q1 2017, non-mall shopping center vacancy stood at 7.3%, the exact same rate as it did three months earlier. In fact, despite all of the challenges faced by the retail sector over the past couple of years, non-mall vacancy has been on a consistent downward trend since Q1 2010 when it peaked at 10.2%; in the intervening seven years since then it has increased only once.
This is for a very simple reason; the lion’s share of contraction in the retail world today is happening in just a few categories and those categories primarily consist of tenants that have traditionally mainly been active in either mall or urban space. The greatest amount of consolidation currently occurring today is in the apparel and department store sectors, which are overwhelmingly mall and urban focused in terms of their real estate. But in the non-mall shopping center world (which consists of local neighborhood/community, power and strip centers), the only three major categories in contraction mode have been sporting goods, consumer electronics and office supplies.
While a number of the sporting goods chains that recently declared bankruptcy were active in smaller formats, most of the closures here have been focused on junior box space (20,000 square feet to 40,000 square feet in size) in power centers. The bankruptcy and ongoing liquidation of HH Gregg is single-handedly driving closures in the consumer electronics sector—again in that 20,000 square foot to 40,000 square foot range, primarily at power centers). Meanwhile, contraction from Staples and Office Depot continues in that same basic space range with most of the closures again focused on power centers.
Yet, as of the close of Q1 2017, power center vacancy in the United States stood at just 5.5%, up from 4.9% a year ago. This rate will be climbing in the months ahead—HH Gregg had only begun to close stores at the close of the quarter and so those numbers won’t really begin to show until Q2 statistics. Meanwhile, the continued consolidation of Staples and Office Depot will gradually release space back to the market over the rest of the year. This sector took a hit last year with the bankruptcy and liquidation of Sports Authority, which resulted in 450 closures last summer. Yet, nearly a third of that space had been backfilled or leased by the end of last year and this space continues to move at a brisk pace.
There is no doubt that the retail world is currently experiencing the strongest wave of industry consolidation that it has seen since the Great Recession. This is occurring because of two basic factors; the continued acceleration of eCommerce and the ongoing focus of American consumers on value oriented retail. And against this backdrop we have seen a slew of chains struggling with declining sales from their physical stores, especially for those retailers active at mid-level price points. Thus, the brunt of today’s challenges have been shouldered by concepts in the middle that are not just competing increasingly with Amazon and the internet but with discounters as well. One telling statistic is the fact that Amazon will surpass Macy’s as the largest apparel retailer in the United States by later this year, but based on current sales growth trajectories, TJ Maxx will be in second place by 2021, if not sooner. Yet, in all of the gloom and doom of today’s headlines, that statistic seems to have been lost. While mid-price point retail may be in the midst of the strongest wave of contraction we have seen in nearly a decade, off-price and discount concepts have exploded with growth.
This is why mall vacancy is climbing (though this has disproportionately been about Class B and C centers—Class A centers are seeing nowhere near the same challenges and Class A+ centers are thriving), while non-mall shopping center vacancy is holding is basically holding its own.
This is not to say the non-mall shopping center world isn’t feeling some pain. Occupancy growth in Q1 was flat. Non-mall shopping center occupancy growth accounted for just 4.9 million square feet (MSF) of positive net absorption in Q1 2017. That is the lowest amount of net absorption that we have tracked in this space since Q1 2012. And much of this was driven by new construction. Nearly 80% of this quarter’s occupancy growth came from tenants taking occupancy in newly delivered projects, the leases for many of which were inked as long as a couple of years ago. All told, new development added 5.9 MSF of space to the market in Q1, most of which was in the form of new neighborhood/community centers (over 2.9 MSF). It may come as a surprise to many that there is any development occurring at all, but the reality is that even in today’s more challenging environment, tenants are actually looking to new or Class A space for opportunities despite the fact that there are plenty of opportunities at Class B and C centers to be had at bargain rates. This may seem like a conundrum to many, but the logic is actually crystal clear. If the new omnichannel world of retail means having an increased presence online and fewer physical stores, the locations for those physical stores is more important now than ever before. This is why we continue to see new projects under development, though construction levels are dropping and speculative development is now virtually unheard of. As of the close of Q1 2017, we were tracking just over 20.7 MSF of new product under development in the United States with delivery dates scheduled through 2018. That’s down from about 26 MSF of space in the pipeline a year ago.
Meanwhile, while all the headlines are covering iconic mall based brands and their travails, the reality is that a number of categories have been, and continue to be, on fire with growth. While we expect power center vacancy to climb in the year ahead, this is going to be substantially mitigated by the fact that off-price apparel players like TJ Maxx, Ross, Marshall’s, Nordstrom Rack, Burlington and others are each hoping to open between 30 to 60 new stores annually over the next few years. These players were actually starting to struggle to find quality space—the most recent wave of closures from the sporting goods and office supplies sector will overwhelmingly be backfilled by players like these. Meanwhile, we continue to see growth from junior box (20,000 SF to 40,000 SF) niche grocery users ranging from organic to ethnic concepts (two discount grocery chains from Germany alone, ALDI and Lidl, plan on more than 200 new stores in the U.S. over the next two years).
This is not to say that the non-mall shopping center world is without its own challenges. Nearly all of the categories that have driven growth in the non-mall shopping center marketplace over the last seven years are starting to face the challenges of market saturation. But most aren’t there yet.
Dollar store chains may be the closest to this saturation point; this sector has added more than 7,000 units nationally in the past five years (or roughly four new stores PER DAY), remains in aggressive growth mode (Dollar General is planning on 1,000 stores this year) though most chains are reporting sagging same store sales. These users have been active in everything from freestanding to strip, neighborhood/community and power/regional space, but their runway for further growth is dwindling. Same store sales comparables for many of these chains has been falling due largely to saturation issues. This hasn’t slowed growth so far, but it is likely to begin doing so in the not so distant future.
Meanwhile, the restaurant sector is not without its challenges. No other sector has accounted for as much unit growth as this one in the post-recession era; planned expansion from just the major chains has averaged over 12,400 units annually since 2011 and this only represents about half of the marketplace. We estimate that the United States has averaged well over 24,000 new restaurants annually for each of the last six years. This rate of growth has been slowly declining since 2014 and though it remains robust, the restaurant marketplace is not without its challenges. Market saturation is increasingly becoming an issue as is the rise of “grocerants.” Retail chains as diverse as grocers like Whole Foods and convenience stores like 7 Eleven and even dollar store chains have gradually been adding more prepared food options in their stores. Restaurant failures have been on the rise since early 2016 with market saturation and increased operational costs (from rent to wages) have played a substantial role in this. Casual dining chains have felt the most pain so far (there have been a few notable bankruptcies already and there will be more to follow). But we see just as challenging an environment this year for a number of restaurant categories. Low barrier-to-entry franchise operators are likely to feel the greatest pain in terms of increased labor costs while fast casual players will struggle with the issue of saturation. All of these factors point towards a shakeout sometime in the next 18 months. That said, we still see a deep tenant pool of new concepts looking to grow in the marketplace. It’s just that over the next couple of years this growth will seem more like a game of musical chairs as new concepts take the place of failing ones.
Regardless, the lion’s share of consolidation will continue to be focused on mid-tier, large publicly traded chains (particularly in the apparel and department store categories) that will disproportionately impact Class B and C mall space as opposed to non-mall shopping centers. Class A neighborhood/community centers should continue to see steady tenant demand ahead. The same holds true for Class A power centers, though this segment of the market will see vacancy levels climbing thanks to ongoing big box givebacks, particularly from the sporting goods and office supplies sector. Landlords of Class B and C space will face the greatest challenges, though these will be nowhere near the severity of the challenges that Class B and C mall landlords will be facing in the next couple of years. That said, we are likely to be in a period of rising vacancy levels and diminishing tenant demand through the remainder of this economic cycle. The winners going forward will be quality concepts and quality projects as the chasm in performance between Class A retail real estate and everything else widens.
All that said… check out my webinar. I breakdown who is closing and where. I also breakdown who is opening and where… and what it all means for different retail real estate types. I also explore what is hot (YES there actually are some hot sectors and concepts out there!). Click here to check it out.
By the way, here are some links you might find useful…
Cushman & Wakefield’s Global Q1 2017 MarketBeat Reports can be accessed by clicking here.
Our Chief Economist and Director of Global Research, Kevin Thorpe, just released an extremely insightful look at Trump: The First 100 Days. This piece looks at different policy proposals from the new administration and their potential impact on commercial real estate.
Our Bricks vs. Clicks Webcast Series Part I and II explores the impact of the 2016 holiday shopping season and eCommerce on supply chain and bricks-and-mortar retail. Bricks vs. Clicks reviews and further analyzes relevant data points, shopping trends and effects on the industry and its consumers in 2017.
Our Main Streets across the World Report tracks high street retail around the world and breaks out the globe’s premier shopping districts by continent and average asking rent.
Cool Streets of North America Report and accompanying video series.
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.