Market Conditions Continue to Force Bankruptcy, Store Closures and Shopping Center Vacancy
With six consecutive months of employment contraction confirmed, gas prices at the highest level ever, most retailers producing negative comparable store sales, and consumers' expectations for the future at the lowest point ever, CoStar is taking a half-year look at how consumers' tightened pockets are rubbing off on the retail real estate sector in the form of store closings and increased shopping center vacancy.
Each Monday, CoStar religiously informs readers of store closings announced in the weekly
Retail News Roundup column. From tallying those store closings announcements we covered back to the start of 2008, CoStar estimates that 4,491 closings have been announced so far this year (1,949 in first quarter and 2,542 in second quarter).
The International Council of Shopping Centers (ICSC) tracks this data as well and counted 2,122 store closing announcements during first quarter in an April Business Conditions report where it also predicted 6,500 store closing announcements by the end of 2008. We talked to ICSC earlier this week, and while it's not ready to release its half-year figures until Friday, the organization did say a revised full-year estimate would likely be included.
Based on a comparison to ICSC's historical store closing figures, CoStar expects at least another 2,600 store closings to be announced in the latter half of this year. The number of store closings already recorded during the first half of the year exceeds all year's past (ICSC shows records back to 2001), so the number of store closings recorded in 2008 will likely exceed ICSC's highest annual figure -- 7,041 store closings announced in 2001.
If you are having trouble viewing this chart on your screen, follow this link to view it in full size.
Two retailers on the brink of collapse with strong potential to announce major store closings over the next six months include Steve & Barry's
(Update: Steve & Barry's filed bankruptcy just after this story was published and said it would likely liquidate assets), which operates 276 stores, and Circuit City, which operates 696 U.S. stores. Add to this the likelihood that Linens 'N Things will liquidate the remainder of its store fleet (382 stores, as it already announced 120 closings in May and another 87 this week) and Whitehall Jewelers, which just filed bankruptcy, will liquidate its 373 stores, and there is already another 1,721 possible closing announcements over the next six months.
Ivan Friedman, president and CEO of RCS Real Estate, a company that specializes in helping retailers evaluate their real estate portfolios and facilitate store dispositions, told CoStar he expects to see "a lot more bankruptcies through the rest of this year" and also expects that companies will continue to close unprofitable stores - whether it's healthy retailers "retrenching" or hurting retailers being forced to close.
Specifically, Friedman expects another 1,500 store closings to be announced during third quarter and another 1,000 in the fourth quarter -- he added that he "wouldn't be surprised" if we witness more store closing announcements this year than ICSC's 2001 high. He explained that fewer store-closing announcements are made in fourth quarter because retailers who are able to make it through the third usually stick it out through the holiday selling season. And if so many retailers will do their best to hold on during the holiday selling season, what's in store for first quarter 2009? "It won't be pretty," said Friedman.
Todd Manning with the retail investment services division of Marcus & Millichap's National Retail Group gave his store closure expectations. "Compared to last year, it seems that this year there are more ‘high-profile’ store closures and more bankruptcies causing store closures. The mounting job losses and steep oil price increases are increasingly hurting retail sales and will make it hard for some retailers to hang on to stores in tertiary and even secondary locations. I don’t think we are yet halfway through all the announced store closures to come this year. On the flip side, with every store that closes a portion of sales are redirected to those retailers that remain, thus the industry strengthens itself as it pares down."
The chart above pairs the store closing announcement trend with U.S. shopping center quarterly vacancy figures over the last five years.
(A query in CoStar Property Professional of shopping centers 20,000 square feet or larger produced the vacancy rate statistics. For more fundamental statistics on the retail real estate industry, CoStar's Mid-Year National Retail Report is now available to subscribers on the CoStar home page.) Consistent with all commercial property types, shopping center vacancy has been consistently on the rise. However, it's a little more disconcerting when we factor in the significant lag time that exists between a store closing announcement being made and that store becoming vacant.
Michael Niemira, ICSC's vice president, chief economist and director of research, softened the connection a bit by saying to CoStar in an email, "Vacancies rise as store closures go up and the number of new stores opening slows -- a clear function of the economy; but even with all the store closures, the percentage of existing retail establishments is quite small." In a report, ICSC reiterated the point, saying "Even if the number of store closing announcements reaches a high not seen since 2001, the share of store closings remains less than 1% of the existing number of establishments. Perspective is important."
It is also important to point out that while the shopping center vacancy rate has increased to 7.4%, that figure is still very strong -- anything over 92% occupancy in the current market conditions is considered favorable.
Want to share your thoughts on this topic? Email senior editor, Sasha Pardy at spardy@CoStar.com. We'll post pertinent comments as updated to this story.
Market Conditions
In a July 3 report, ICSC said, "Few doubt it now. Recession is here. With the June U.S. employment report now in hand, the U.S. Bureau of Labor Statistics confirms six consecutive months of decline for payroll employment ... one of the criterion for recession has been met."
And in a note proving how store closings and retailers making cutbacks has affected those employed in the shopping center industry, ICSC said, "ICSC’s benchmark for the U.S. shopping center industry’s employment puts job loss at 3,000 jobs in June -- the seventh consecutive monthly job contraction for a cumulative industry employment loss of 159,000 jobs in 2008. The cumulative shopping center industry job drop is equivalent to about a third of the total U.S. employment contraction this year."
Add to this job loss the fact that wage growth isn't very strong -- ICSC said, "As of June, the year-over-year pace of average hourly earnings rose by 3.4% - its slowest gain since January 2006 (+3.3%) and wage gains are likely to slow even further ahead" -- and we've got just another factor to combine with increased gas and food prices
(According to the U.S Energy Information Administration, the average national price for a gallon of regular-grade gasoline at the pump rose by 1.9 cents over this past week to a record $4.114 on July 7, which is up 38% over the same week last year) that is keeping consumers from spending their money at shopping centers.
The Conference Board’s June Consumer Confidence Index came in at 50.4, down quite a bit over May, a stark comparison to confidence of over 95 in October 2007, and the fifth lowest index reading ever. In addition, consumer's perception of the future - the Expectations Index -- declined to 41.0 in June, a significant decline over May. "Looking ahead, consumers' economic outlook is so bleak that the Expectations Index has reached a new all-time low," said Lynn Franco, director of The Conference Board's Research Center.
While these factors have been reflected in retailer's sales results, the impact doesn't seem to be drastic yet. April and May retail sales were good and June sales were the best in a year -- at least for those retailers offering deep discounts. ICSC's June chain store sales index showed a 4.3% increase on a year-over-year, same-store sales basis. "June came in better than expected thanks to stimulus checks and warmer weather," said Niemira. In the May report Niemira said, "It is very clear that consumers are spending in a conservative manner as the lift largely came from an increase in sales in the wholesale, drug store and discount sectors," said Niemira. ICSC expects to see a 2.0% to 3.0% increase in July.
Want to share your thoughts on this topic? Email senior editor, Sasha Pardy at spardy@CoStar.com. We'll post pertinent comments as updated to this story.
The Direct Effect
But how directly tied are these fundamentals to the health of the retail real estate industry? In Marcus & Millichap's mid year local market retail reports, the brokerage company said "a soft economy will pressure property fundamentals in the months ahead by reducing consumer spending, thereby trimming demand for space."
Todd Manning with the retail investment services division of Marcus & Millichap's National Retail Group said, "Gas prices are having a significant effect on real estate decisions. The topic comes up in nearly every conversation I have with both private and institutional investors and many have serious concerns about how deep this ‘consumer recession’ can get. The health of the consumer is paramount to the success of retailers and right now the consumer is getting battered by possibly their most quantifiable and non-elastic expense - gas prices."
"As opposed to the housing downturn, which was already dragging down the consumer, gas prices are a much more ‘real’ expense and affect even more people - homeowners and renters alike. The money these consumers would have spent at the local sub shop or nail salon is instead going to the oil company. Many franchisees and mom-and-pop retailers were already seeing huge sales drops before the dramatic rise in gas prices," he added.
"The decrease in consumer spending has a direct correlation to the increase in vacancies. Most retailers, particularly small franchisees, need sales growth to keep up with their rising costs - rent, supplies, food, energy, and labor. One franchisee that I talked to last week, located on one of Las Vegas’ busiest streets, has seen sales drop more than 30% and is now asking their landlord for a corresponding rent adjustment to stay afloat," said Manning.
About the impact on the retail investment brokerage business, Manning said, "The increased weakness in retail fundamentals is causing potential buyers to significantly re-price retail properties - requiring higher returns to compensate for higher risk. Investors should be cautious about top-of-the-market rents and be conservative in their underwriting, paying particular attention to the time it will take to re-lease space and the rates and terms they will need to offer to compete for tenants. Regardless of the tenant mix, investors should be looking at several possible scenarios if tenants vacate and see if the current rents pose an upside or downside to the property."
Nancy Yates, vice president at ICORR Properties International in Sarasota, a company focused on retail investment, told CoStar how gas prices are affecting its strategy, "We are considering a change in the way new tenants look at locations. We believe they will want demographics that are within the 1-3 mile radius versus 3-5 mile radius, due to the gas situation."
Matthew Falconer, head of Falcon Development, which specializes in developing retail space adjacent to Super Wal-Marts said, "I’ve stopped developing as of Oct. 2007. Above $3 per gallon our current growth does not work. Too much of the consumer income goes to energy for home and auto. Until we dip below $3 per gallon, I am on hold."
Want to share your thoughts on this topic? Email senior editor, Sasha Pardy at spardy@CoStar.com. We'll post pertinent comments as updated to this story.
Friedman pointed out that market conditions aren't the only factors that have lead to "the percentage of closures this year being far in excess of the last three years." He explained that the change in bankruptcy law passed in 2005 putting a time limit of 210 days for retailers to make store-closing decisions has had. "Usually, lenders say you have 90 days to find someone to buy you or liquidate you, because then that leaves 120 days to liquidate the inventories, and you need the stores to accomplish that," explained Friedman.
While one would think times are pretty good for RCS right now, being that the company is in the store closing business and has won several store disposition listings lately. Friedman commented, "Sure, our revenues are up in the 40% to 50% range; but that's not good. It's not like it's kind of bad and that's good for us. I'm really feeling a very dire effect right now."
But RCS is having trouble disposing of these leases. "You've got nobody to sell to. It's not like in the housing market where there are people buying mortgages and underpriced houses because there's capital there. Retailers just don't want to open stores. And those that are pick the best stores in the best malls in the best locations, getting the best prices now opportunistically. Other than those most wanted locations, nobody is leasing them."
To reiterate, Friedman gave an example of a recent conversation with one of the country's largest retail landlords that he went to about a bankrupt retailer RCS is disposing of stores for. "I tell him I have people interested in buying the leases, but they don't conform to his use clause, and the landlord says - 'please bring me a warm body'. That tells you how bad it is," said Friedman.
RCS also serves as an outsourced real estate department for some retailers. Friedman said he’s playing hardball with landlords. "We have a 1,000-store retailer that has 250 leases coming up for renewal. I'm not being gentle on hitting these landlords up for cheap rent. If I leave, they can't replace me. So even those that are renewing are taking advantage of reducing rents to get them in line, or else they're going to leave the malls and that's the last thing landlords need is more people leaving."
(Editor's Note: To keep up on happenings and trends in retail real estate, subscribe to CoStar's Retail News Roundup, a weekly column covering retailer expansions and new concepts, store closings, bankruptcies, cutbacks, acquisition, mergers, sales. new shopping centers, personnel changes, and sustainability. Follow this link for access to back issues of the roundup. In addition to appearing every week in the national news and retail news sections of our web site, you may also receive the Retail News Roundup for free via email by requesting to be added to the distribution list by contacting senior editor, Sasha Pardy at spardy@CoStar.com Also, click hereto subscribe to CoStar's dedicated Retail RSS Feed.