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Retail stores are closing, but that’s always been part of the strategy

Everyone can agree that the retail real estate industry is evolving - possibly more rapidly than ever. Most headlines aren’t painting a pretty picture and many of the numbers back up those headlines. With nine retailers having announced bankruptcies in the first quarter of 2017, the same amount seen for the entirety of 2016, Credit Suisse estimates there could be more than 8,640 store closings this year. To put that into perspective, that is higher than the historical peak of 6,200 during the recession in 2008. Some critics have gone as far as dubbing today’s times as the “retail apocalypse,” or the worst period of retail bankruptcies and closings since the Great Recession. But while those reports focus on a bleak narrative, those that have worked with retailers over multiple decades know that store closures are just par for the course. The nature of the retail world is competitive and as shifts happen within the industry, changes to real estate strategies will follow.

Number of Retail Stores Closing in Early 2017

With any change comes opportunity, so we spoke with some of SRS’ leading brokerage experts who have handled portfolio disposition for four of the seven largest retailers in the U.S. They gave us their take on the realities of retail real estate dispositions, backfilling space, and new and evolving retailers who are seizing opportunity.

Consumer preferences shape the retail environment

No retailer is completely immune to shifts in consumer behavior. As consumers’ priorities and preferences change, their spending follows suit. Currently, more and more shoppers are focusing their spending on restaurants, entertainment, travel and technology, over more traditional retail. “There are so many good retailers entering the market, and the retail market is by nature very competitive. Those that bring a newer, faster, fresher, more unique experience are just driving out some of the concepts that haven’t been able to adapt,” said John Artope, executive vice president and market leader in SRS’ Orlando and Tampa offices. “The proliferation of online shopping opportunities is part of what is driving the competition,” said Ryan Johnson, senior vice president and co-market leader in Dallas/Ft. Worth. “The retail store no longer has the advantage of being the only place with a large selection of goods at cheap prices. Now, you can find so much online.”

U.S. eCommerce Sales & Percentage of Retail Sales 2012-2016

As e-commerce is driving more consumers to shop online, retailers with large collections of large physical stores are being hit hard. “Big box retailers have the greatest need for property disposition as they undergospace rationalization, and attempt to determine how to get the same or more sales out of a smaller footprint,” said Cody Persyn, senior vice president and market leader in SRS’ Houston office.

In addition, retailers are closing stores that they perceive to be at a competitive disadvantage. “Whether it’s a shift in shopping habits of the customer, or the neighborhood complexion has changed around a location, retailers are always going to want to put their resources and capital towards their best performing locations,” said Mark Reeder, executive vice president and co-market leader in Dallas/Ft. Worth. “That means closing, or relocating their underperforming locations.”

“Many big department stores and other anchor retailers are closing due to the discount stores and off-price retailers taking a larger share,” said Rick Ikeler, senior vice president in Dallas/Ft. Worth. These types of retailers are in demand due to behaviors that shoppers developed during the recession. Consumers turned into bargain-hunters to stretch their dollars, and logo-driven brands were passed up for fast-fashion and discount outlets. This is causing the apparel category to have an especially challenging time, particularly those brands that cater to a younger shopper. Rue21, The Limited, Wet Seal, True Religion and BCBG Max Azria have all filed for bankruptcy this year.

While apparel and accessory spending is down, travel is booming and the growth of restaurants is staggering. Consumers of all ages have gravitated to a more experience-driven lifestyle. “We are seeing retail evolving and incorporating more experiential retail,” said Johnson.

Retailers who can seize the opportunity

The availability of retail space, and relatively low amount of new development puts expanding tenants at an advantage. “We try to target national and regional retailers who might be interested in multiple stores. We’ve had a dollar store concept look at our lists of availabilities and take as many as 11 locations at one time,” said Matt Alexander, executive vice president and managing principal in the San Francisco office.

Landlords are also getting creative when backfilling space, especially with big box vacancies. “A lot of the stand-alone big boxes are prime for non-retail redevelopment. We’ve seen them converted to office space, churches, or self-storage,” said Persyn. “The need to continue to bring shoppers into the center is vital, so fitness, theaters, and entertainment concepts are becoming more prevalent within the centers.” Artope is seeing activity from grocery and specialty stores in Florida, while Alexander has seen quite a bit of interest from dollar stores, auto parts retailers and urgent care centers for the spaces he is marketing for a national drug store client.

 “Some retailers are keeping their cost of occupancy in-line with sales by fulfilling some online orders from stock in their brick and mortar stores. In this way they more fully utilize their existing real estate,” said Reeder. Some traditionally retail spaces, particularly within malls, are converting to facilities used by retailers for other operational uses, such as the 75,000 square feet of space recently leased by Bed Bath & Beyond at West Oaks Mall in Orlando. The space once occupied by a Belk department store will be used as a call center for the retailer, according to a piece published by the Wall Street Journal.

So where do we see things headed?

“Store closures tend to happen in waves. Once one retailer announces a large number of store closings, it makes other retailers feel safer to do so if they were considering those actions. We’ll probably see those decisions being made through the rest of this year,” said Artope. That means as 2017 continues, we are likely to see more distressed retailers reach a decision to shut down stores. To acclimate to changing consumer preferences, we may also see more retailers shifting their merchandise offerings, adding classes and instructional opportunities, or offering food and beverage. Undoubtedly, those that weather the shifting retail climate will come out having created a more interactive experience for their customer.

When a retailer is considering the closure of multiple locations across a broad geography, having a real estate services partner who can execute quickly and programmatically is essential. The sooner those occupancy costs are off their books, the sooner they can make better use of that capital. Having a strong network of brokers can help expedite the process, said Alexander. “When we take on a disposition assignment, we are able to utilize SRS’ network of brokers in more than 20 offices nationwide to present those properties to a larger pool.” Reeder feels passion for the service is a necessity. “Our level of experience and our desire to specialize in the disposition category gives SRS an advantage when our clients have those needs. Portfolio disposition can be a challenge to do well. It is process oriented and there is more work up front than with other types of activities. But it’s our desire to take on that challenge and determination to deliver results that makes us stand apart.”

To learn more about our portfolio disposition services, visit SRSRE.COM/PortfolioDisposition or contact steve.dawkins@srsre.com or 214.560.3150.

 

 

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