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Commercial: Retail sector lags behind improving economy

June 26-July 2, 2018: Volume 34, Issue 1

 

By Reginald Tucker

What do Sears, Kmart, J.C. Penney, Macy’s, Payless, Toys ’R Us, Walgreens, Michael Kors and Gymboree have in common? They are among the scores of big retail names that announced massive store closings last year. Sears (358 stores in 2017; 63 in January this year alone); J.C. Penney (138 stores); Macy’s (68 stores); and Payless Shoe Source (900 locations), to name a few.

According to a CNN Money report, retail outlets announced the closure of more than 6,000 stores in 2017, which beats the previous all-time high of 6,163 store closings in 2008 amidst the financial crisis. On top of that, more than 300 retailers filed for bankruptcy by mid-2017—a 31% increase over the same time in 2016. That begs the question: Why is it that the retail sector—which represented about 7% of commercial flooring activity in 2016 but only about 4% last year—is lagging behind other end-use markets that are on the rebound in an improving economy? Industry experts cite increased pressure from online operators combined with dramatic changes in brick-and-mortar retail design. A recent study from Pew Research Center found that nearly 80% of Americans do at least some shopping on the internet, with 43% shopping online weekly or a few times a month.

“Technology has accelerated the decline of retailers who have not been in touch with what their consumers wanted as much as their competitors,” said Richard Kestenbaum, contributing writer for Forbes magazine. “Technology helps consumers see more of what’s available, and that makes the comparison between brands so much more stark and apparent.”

One reason behind all the retail store vacancies—the highest they have been in six years—is the ongoing evolution of retail formats. According to Kestenbaum, the main reason why we are seeing so many vacancies (even though more stores are opening than closing) is the footprint and locations of the stores being closed aren’t suitable for the stores being opened. Simply put, the old stores’ formats can’t be transformed, and their locations don’t work for the new stores that are opening.

Outlook for remainder of 2018
Unfortunately, the trend seen in 2017 and in the years prior is expected to continue for much of 2018. According to a CNBC report, the amount of retail space “going dark” in 2018 is on pace to break a record, as companies with massive floorplans are either trimming back their store counts or liquidating altogether.

As of April, more than 90 million square feet of space is expected to be vacated, according to commercial real estate services firm CoStar Group, which closely tracks the non-residential construction market. The firm believes that’s on track to surpass a record 105 million square feet of space shuttered last year.

“I think there’s probably a couple more announcements coming,” said Suzanne Mulvee, a senior real estate strategist with CoStar, which predicts 2018 should be a peak year for the amount of retail space closing. “It wouldn’t surprise me to see a few more significant announcements from department stores, and more chains that continue to struggle.”

On the upside, observers believe property owners see the vacancies as an opportunity to fill spaces with new tenants that operate more profitable businesses. In a recent case study on U.S. malls, CoStar Group found top-tier, Class-A mall owners were more likely than other landlords to release a space within one year of a department store anchor moving out. “I think it gets harder and harder [for owners to find replacements] the more these big boxes come on the market,” Mulvee said.