Retail Armageddon Hits High-end Malls and Some Grocery-Anchored Strip Malls May Be Next
Despite previous claims, neither is immune. And despite the growing economy, 2018 is expected to be much worse for retail.
(Disclaimer: I'm not a financial advisor, accountant or attorney. Consult your own financial and/or legal advisors before making any investment or legal decisions.)
"It's the End of the Mall As We Know It..."
2017 set all sorts of terrible records for retail. Decades of overbuilding and growing competition from Amazon and other Internet sites, caused retailers like Macy's, Sears, JCPenney, Kmart, Toys "R" Us and other big-box retailers and grocers to close a heart-breaking 9,000 stores. A brutally record-setting 50 chains filed for bankruptcy. The carnage was far worse than the Great Recession, and many landlords called 2017 the year of "Retail Armageddon."
The loss of even a single anchor tenant can be devastating to a landlord. That's because the departure usually triggers legal clauses that allow the rest of the tenants to terminate their leases or renegotiate for lower rents.
Many times this causes a multi-decade downward spiral. And the loss of multiple tenants, can be fatal. According to Costar, a commercial real estate analysis firm, so-called "zombie power centers" (power centers with vacancy rates of 40% or more) have increased 60% since 2016.
Unfortunately, things are about to get much worse. Cushman and Wakefield, a commercial real estate firm, forecasts a 33% increase in store closings (12,000) and another 25 bankruptcies in 2018. Walgreens, GAP and Gymboree have announced plans to close 3,600 stores. And Sears, Bebe Stores, Stein Mart, Bon-Ton, Destination Maternity are expected by many to announce bankruptcy.
Many investors have fled the retail sector, causing volume to drop to its lowest since 2014.
"... But I Feel Fine. Or do I?"
But the pundits and the financial press spent a lot of 2017 shaking their heads at how "foolish" investors were for pulling out of all retail. And retail sponsors chided investors for "panicking unnecessarily" and leaving money on the table.
Here's a typical example. This authoritative sounding Forbes author talked how Retail Armageddon was "far from accurate", and A Class Malls (20% of malls that generate 70% of mall volume) would be "just fine."
"These 270 or so malls have stellar (and growing) productivity and very low vacancy rates. Relatively few of these malls are being impacted by the closing of anchor tenants. And specialty store vacancies are typically snapped up quickly. The apocalyptic vision painted by some is far from accurate. Most higher-end malls will continue to thrive with an approach that looks rather familiar... With few exceptions, investors, customers and employees are going to be just fine."
Other pundits claimed the smart money was investing in top 10% power centers. Many investors took the advice, and moved their money into these high-end retail investments.
"The Titanic's Unsinkable! Wait, what's that water on the floor..."
So how is this panning out so far? CoStar just released a 2017 summary report called: "Declining Occupancy, Rent Growth Spreading to Top Tier of Best-Located US Retail Properties."
Pundits reading it may feel like a passenger on the "Titanic," seeing water creeping in on the lower decks. But the report is undeniable. It says:
"Even the best performing and most well located U.S. malls and shopping centers are beginning to feel the pinch of flat-lining rent growth and a vacancy uptick as e-commerce continues to take market share from brick-and-mortar retailers and the retail sector enters the late stages of the real estate cycle."
They go on to explain that this supposedly immune class is actually seeing "rising vacancies," "flat-lining" of rent and even "rent erosion." Vacancies in premiere, top 10% locations that were supposed to be snapped up quickly "are in many cases taking longer to lease up, reflecting broader weakness."
What will happen in 2018 as the damage accelerates? They conclude: "vacancy rates for malls, shopping centers expected to tick up in 2018 despite robust retail spending and economic expansion".
Groceries fare a lot better: but no longer a slam dunk?
In contrast, grocery-anchored retail saw smooth sailing in 2017, with increasing demand and falling vacancies. And so far at least, consumers still want to visit the grocery store in person. (Although arguably, that could change also. I haven't made a weekly grocery visit in two years; once in-home delivery became available in Tampa).
Ignoring long-term trend changes, CoStar noted potential short-term issues for 2018-2019. Lots of people have noticed the strength of grocery anchored locations, and are lining up to build more. If too much of this happens, it causes oversupply and can ruin it for everyone.
And already, some existing properties are feeling some heat. And similar to malls, this is not limited to the B and C players, but is also starting to affect the A players.
"We're seeing increasing delinquency rates in CMBS issuance among centers with mid-market grocers such as Albertsons, Winn Dixie and even Publix as a large tenant.
While total retail space per capita has decreased by about 5% since 2009, the amount of anchored space per capita has increased by the same amount during that period amid competition from big-box chains that have added food and groceries to compete with grocery chains.
Because many developers and landlords still consider the grocery anchored sector to be a safe defensive play against e-commerce that brings foot traffic, we are continuing to see more absorption and development that could perhaps lead to issues with oversupply."
So, it remains important to scrutinize any grocery-anchored retail investments for these issues.
