July 16, 2008
More Shopping Centers Looking for Tenants
The recent announcement that Steve & Barry’s was seeking Chapter 11 bankruptcy protection and would close a large number of stores has sent a shiver through shopping center operators who have watched vacancy rates continue to climb in recent years.
A study by Reis Inc., a real estate analysis firm, found the vacancies at neighborhood and community shopping centers are running at a five year high.
Stuart Hirshfield, a bankruptcy lawyer at Mintz Levin, said that in the current environment, even prime anchor space could be hard to fill. He talked about the possibility of Steve & Barry’s closing stores as part of its Chapter 11 bankruptcy filing. “Their stores could be dark and be dark for a while,” he told MarketWatch. “It does put a strain on mall operators and their own revenues.”
According to the Reis study, increased food and energy costs have meant that consumers are no longer willing to travel long distances to shop or stop at multiple locations while they are out. Larger discounters offering near one-stop shopping have been the main beneficiaries of consumers’ new purchasing patterns. Retailers in smaller shopping centers have not fared as well.
“If there’s a big concern it’s on the small center side,” Michael Niemira, chief economist at the International Council of Shopping Centers, told Women’s Wear Daily (WWD). “Whether the centers can capitalize on the trend of shopping closer to home because of gas prices remains to be seen.”
Discussion Questions: Will we begin to see shopping center vacancy rates level off and slowly begin to decrease? If consumers are drawn to centers with large discounters, what can merchants in smaller locations do to convince consumers that it is a wise use of gas to drive to these stores?
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6,000 supermarkets will close this year. Gas prices are unlikely to come down soon. Time to outthink and outsmart the competition. The leanest, smartest, most innovative, differentiators will create the compelling reasons for people to either shop online or leave their homes to go to brick and mortar stores. Vacancy rates will undoubtedly rise as consumer shopping patterns change and the economy tightens its belt. Whether this is bad news or opportunity depends how innovative you are. Bricks and mortar costs a lot of money.
The shift in cost structure is hitting the specialized and small retail establishments from both sides. Customers don’t want to make multiple trips and are seeking lower prices (i.e. smaller margins). Delivery costs are only going higher and the cost of frequent small deliveries is no longer affordable. But maybe there is an option here….
BRING BACK KORVETTS! I don’t know the details, but my understanding of the old Korvetts stores (named after 5 Korean Veterans who started it) was that they leased a lot of their departments. Just like consolidator warehouses carry the products of many manufacturers, maybe there is a place here for a “consolidator retailer.” I haven’t really thought this whole thing through, but by combining loads, sharing utilities and front-end costs, and generally spreading operating costs across several banners it might be possible to maintain presence while reducing expenses. Combine this with “shop online and store pickup” and you have a real problem solver for the consumer. This means the mall operators need to rethink how they sell their services and offer space that can accommodate the new retail format.
At least for the short-term and mid-term, I expect to see vacancy rates at shopping centers continue to rise. There’s a parallel to the overall housing and real estate markets, where it will take more than a few months to hit bottom and clear excess inventory. Mall developers might have learned a painful lesson from the high development allowances they were willing to pay Steve & Barry’s, which turned out to be a financial house of cards. And there are other retail failures and consolidations to come before a true turnaround begins…just imagine what kind of vacancy issues would be raised if Sears needs to close mall locations more forcefully.
Several issues are converging to make visiting retail outlets less frequent than normal: high gasoline prices, use of the Internet, and a reason for visiting. With high gas prices, consumers are rethinking their trips and eliminating non-essential trips. With increased use of the Internet, people can find most products on the Internet and don’t need to visit stores. Unless consumers have a good reason (information, education, or entertainment), there is no compelling reason to visit a particular retail outlet. As a result, vacancies are likely to increase for the near term.
The American market is simply over-stored. Increased online shopping will continue to reduce brick and mortar share of retail sales. The vacancy rate will continue to increase until the supply is reduced. Increased fuel cost will increase online shopping at the expense of stores. This does not mean stores will go away, but will require retailers to build new and close old as the market dictates, not just build new stores.
Wait until Kmart and Sears throw in the towel and then we will really see a lot of vacancies. For all practical purposes, we consider a Kmart that is open to be a vacancy. Some believe that the the only thing worse than being stuck in a shopping center with a vacant Kmart is being in one with a Kmart that is still open.
Should retailers make long term decisions based on the short term price of gas? Who knows? If we take over all the oil wells we won in the Iraq war, drill offshore and in Alaska, oil prices might suddenly come down. Combine that with the trend towards hybrid and electric vehicles and fuels price concerns could go away.
A good retail format in a good location will offset any concerns over fuel prices. Vacancies are not caused by fuel prices. Bad retailers who make poor real estate decisions are to blame. Merchants, regardless of the location type, can convince shoppers to come to their stores by simply offering them a compelling reason to come. Let’s get real; Steve & Barry’s wasn’t all that good.
The answer to this question really goes to what part of the country our we speaking about and who is the owner. In Central Florida, many retailers are still doing well due to the weak dollar which has caused an influx of foreign tourists. In addition, some markets have been only slightly impacted by the overall market conditions.
Consider The Villages, which is the largest residential development in the US and probably the largest retail development in the US. The residential foreclosure rate is 0.05%, home sales are up 18% over last year, and retail sales in the largest town center are up 14% over last year. It is an active adult community and that demographic has been the least impacted by the economy. Vacancy there should remain very low. Some owners will do better than others because they are more nimble, respond quicker, and work harder to make deals with the right tenants.
We’ve known for a long time that the market is over-stored, and it’s evidenced by the continual heavy discounting and relentless price competition that’s endemic to the mass market. The retail consolidation that we’re seeing, along with the growth of alternative channels suggests that we may be looking at unusually high commercial vacancy rates of large format properties for quite a while to come.
America has been overstored for decades. The excess square footage was never evenly distributed, though. Driving around Texas and Michigan, for example, anytime since the 1970s, you’d see strip centers with 20% vacancies. Not everywhere in Texas and Michigan, but a lot of places. Places with strong zoning and land-use restrictions, like Vermont, typically don’t have high vacancy rates, even during tough times. It’s all supply and demand.
BTW, now that bank lending standards are tightening, it’ll be harder for the mall owners to build out new locations for growing retail chains, even within existing malls.
At least short-term, vacancy rates are likely to rise. Consumers are feeling pressure from gas prices, inflation and an unsure job market, so they are simply shopping less and purchasing primarily the necessities. But don’t count smaller centers out simply because they don’t have large discount retailers as tenants. Often these small centers can outposition the large ones by being closer to residential neighborhoods. Given that positioning and an approach to finding tenants that mimics “merchandising” a store, small centers can create their own one stop shopping experience. Prices may be slightly higher at the smaller retailers than at large discounters, but the savings in gas could outweigh that expense for the consumer.
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6,000 supermarkets will close this year. Gas prices are unlikely to come down soon. Time to outthink and outsmart the competition. The leanest, smartest, most innovative, differentiators will create the compelling reasons for people to either shop online or leave their homes to go to brick and mortar stores. Vacancy rates will undoubtedly rise as consumer shopping patterns change and the economy tightens its belt. Whether this is bad news or opportunity depends how innovative you are. Bricks and mortar costs a lot of money.
The shift in cost structure is hitting the specialized and small retail establishments from both sides. Customers don’t want to make multiple trips and are seeking lower prices (i.e. smaller margins). Delivery costs are only going higher and the cost of frequent small deliveries is no longer affordable. But maybe there is an option here….
BRING BACK KORVETTS! I don’t know the details, but my understanding of the old Korvetts stores (named after 5 Korean Veterans who started it) was that they leased a lot of their departments. Just like consolidator warehouses carry the products of many manufacturers, maybe there is a place here for a “consolidator retailer.” I haven’t really thought this whole thing through, but by combining loads, sharing utilities and front-end costs, and generally spreading operating costs across several banners it might be possible to maintain presence while reducing expenses. Combine this with “shop online and store pickup” and you have a real problem solver for the consumer. This means the mall operators need to rethink how they sell their services and offer space that can accommodate the new retail format.
At least for the short-term and mid-term, I expect to see vacancy rates at shopping centers continue to rise. There’s a parallel to the overall housing and real estate markets, where it will take more than a few months to hit bottom and clear excess inventory. Mall developers might have learned a painful lesson from the high development allowances they were willing to pay Steve & Barry’s, which turned out to be a financial house of cards. And there are other retail failures and consolidations to come before a true turnaround begins…just imagine what kind of vacancy issues would be raised if Sears needs to close mall locations more forcefully.
Several issues are converging to make visiting retail outlets less frequent than normal: high gasoline prices, use of the Internet, and a reason for visiting. With high gas prices, consumers are rethinking their trips and eliminating non-essential trips. With increased use of the Internet, people can find most products on the Internet and don’t need to visit stores. Unless consumers have a good reason (information, education, or entertainment), there is no compelling reason to visit a particular retail outlet. As a result, vacancies are likely to increase for the near term.
The American market is simply over-stored. Increased online shopping will continue to reduce brick and mortar share of retail sales. The vacancy rate will continue to increase until the supply is reduced. Increased fuel cost will increase online shopping at the expense of stores. This does not mean stores will go away, but will require retailers to build new and close old as the market dictates, not just build new stores.
Wait until Kmart and Sears throw in the towel and then we will really see a lot of vacancies. For all practical purposes, we consider a Kmart that is open to be a vacancy. Some believe that the the only thing worse than being stuck in a shopping center with a vacant Kmart is being in one with a Kmart that is still open.
Should retailers make long term decisions based on the short term price of gas? Who knows? If we take over all the oil wells we won in the Iraq war, drill offshore and in Alaska, oil prices might suddenly come down. Combine that with the trend towards hybrid and electric vehicles and fuels price concerns could go away.
A good retail format in a good location will offset any concerns over fuel prices. Vacancies are not caused by fuel prices. Bad retailers who make poor real estate decisions are to blame. Merchants, regardless of the location type, can convince shoppers to come to their stores by simply offering them a compelling reason to come. Let’s get real; Steve & Barry’s wasn’t all that good.
The answer to this question really goes to what part of the country our we speaking about and who is the owner. In Central Florida, many retailers are still doing well due to the weak dollar which has caused an influx of foreign tourists. In addition, some markets have been only slightly impacted by the overall market conditions.
Consider The Villages, which is the largest residential development in the US and probably the largest retail development in the US. The residential foreclosure rate is 0.05%, home sales are up 18% over last year, and retail sales in the largest town center are up 14% over last year. It is an active adult community and that demographic has been the least impacted by the economy. Vacancy there should remain very low. Some owners will do better than others because they are more nimble, respond quicker, and work harder to make deals with the right tenants.
We’ve known for a long time that the market is over-stored, and it’s evidenced by the continual heavy discounting and relentless price competition that’s endemic to the mass market. The retail consolidation that we’re seeing, along with the growth of alternative channels suggests that we may be looking at unusually high commercial vacancy rates of large format properties for quite a while to come.
America has been overstored for decades. The excess square footage was never evenly distributed, though. Driving around Texas and Michigan, for example, anytime since the 1970s, you’d see strip centers with 20% vacancies. Not everywhere in Texas and Michigan, but a lot of places. Places with strong zoning and land-use restrictions, like Vermont, typically don’t have high vacancy rates, even during tough times. It’s all supply and demand.
BTW, now that bank lending standards are tightening, it’ll be harder for the mall owners to build out new locations for growing retail chains, even within existing malls.
At least short-term, vacancy rates are likely to rise. Consumers are feeling pressure from gas prices, inflation and an unsure job market, so they are simply shopping less and purchasing primarily the necessities. But don’t count smaller centers out simply because they don’t have large discount retailers as tenants. Often these small centers can outposition the large ones by being closer to residential neighborhoods. Given that positioning and an approach to finding tenants that mimics “merchandising” a store, small centers can create their own one stop shopping experience. Prices may be slightly higher at the smaller retailers than at large discounters, but the savings in gas could outweigh that expense for the consumer.