By: Suzanne Mulvee, Director of U.S Research, Retail
In making our annual market predictions for 2013 last month, CoStar Group’s PPR subsidiary wagered that store closings by national retailers would again top 50 million square feet of space this year. It wasn’t much of a stretch, as many national chains have already announced downsizings - including Sears, Blockbuster, Supervalu and Hostess Outlet stores.
There are other chains that have not announced closings but are likely to in 2013. For that list, we turn to the bond market and pricing on five-year credit default swaps (the higher the spread, the more likely the credit is to default).
Share this story with your followers
RadioShack’s default protection pricing has blown up -- increasing threefold from a year ago to absolutely astronomical levels, suggesting that much of the 14 million square feet it occupies is in jeopardy of going dark.
Supervalu, which continues to post declining same-store sales comps and suffered a 50% decline in profits (and stock price), announced the closing of more than 200 stores, but that list is likely to grow now that the grocery store operator has agreed to sell five brands to a group of buyers led by Cerberus Capital Management.
The bond market also continues to view Sears, Best Buy and JCPenney with caution.
The office supply sector is ripe for consolidation, and bets are for Office Depot to be hit harder than Staples, though we suspect that OfficeMax (whose debt protection pricing is not known) will also be squeezed.
The drugstore sector continues to struggle as well, despite a demographic tailwind. Erosion of the drugstores' traditional market share by the likes of Walmart, Target, and a number of e-tailers has led to a decline in pharmacy sales and visits, driving down total store comps. Insurance on Rite Aid debt has fallen from over 1,000 basis points to 734 basis points today; down, but still shocking relative to competitor CVS, at just 43 basis points.
The bond market isn’t always right in estimating the probability of default (for example, many analysts think that JCPenney has found a winning formula). But certainly those retailers on the left of Exhibit 1 are suspect. Unfortunately for store owners, it seems that the weaker the chain, the more power it commands when it comes to canceling leases.
Keep up weekly on national news, trends and property leads with the Watch List Newsletter,
a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert
. A new issue is published late each Wednesday.