One Bank's Stunning Forecast: "A Quarter Of All Malls Will Close Over The Next Five Years"

One month ago, we first presented several striking charts and observations from Credit Suisse's retail analyst, Christian Buss, who showed the extent of the devastation sweeping through the US retail sector.

To be sure, while the mass shuttering of retail stores - just today Michael Kors announced the company would close up to 125 full-price retail stores - has been a recurrent topic on this website as shown in the chart below...

... and most recently discussed in the context of the next "big short" trade, namely the ongoing collapse in the mall REITs and associated Commercial Mortgage-Backed Securities and CDS, one observation from Buss left us borderline speechless: "Barely a quarter into 2017, year-to-date retail store closings have already surpassed those of 2008."

According to the Swiss bank's calculations, on a unit basis approximately 2,880 store closings were announced as of the end of April, more than twice as many closings as the 1,153 announced during the same period last year. Historically, roughly 60% of store closure announcements occur in the first five months of the year. By extrapolating the year-to-date announcements, CS estimated that there could be more than 8,640 store closings this year, which will be higher than the historical 2008 peak of approximately 6,200 store closings, which suggests that for brick-and-mortar stores stores the current transition period is far worse than the depth of the credit crisis depression.

Another striking fact: on a square footage basis, approximately 49 million square feet of retail space has closed YTD. Should this pace persist by the end of the year, total square footage reductions could reach 147M square feet, another all time high, and surpassing the historical peak of 115M in 2001.

While there was more in the full analysis, the bottom line was simple: there is just too much retail real estate as Urban Outfitters CEO Richard Hayne admitted this past March, when he said "Thousands of new doors opened and rents soared. This created a bubble, and like housing, that bubble has now burst."

The excess retail space means that North America has a glut of retail outlets, as well as far too many shopping malls, something which is becoming apparent as sales per capita decline. As we further showed in the chart below, on a per capita basis, the US has roughly 24 square feet of retail space per capita, more than twice the space of Australia and 5 times that of the UK.

Which brings us to the latest report from Credit Suisse, according to which a staggering 20-25% of the 1,100 US shopping malls - between 220 and 275 shopping centers - will shut down within the next five year, resulting in a shockwave within the US retail and mall REIT sector, and slamming everything from equities to CMBS.

The Swiss bank cited mass store closings, the rise of e-commerce, and the growing popularity of off-price chains, which tend to be located outside shopping malls, among the reasons for the potential mall closings.

While painful for both employees and shareholders, and resulting in millions of total layoffs, Buss sees the closures as a long overdue restructuring of the US retail sector, of which the mass mall closures are just one of the "4 keys for survival" for those US retailers who haven't already filed for bankruptcy. They include:

1) Real Estate Rationalization

  • 20-25% of malls will close, fixed expenses must come down

2) eCommerce Investment

  • eCommerce will grow from 17% of industry sales to 35%-plus

3) Supply Chain Transformation

  • Deep value will grow from 25% of industry sales to 35%

4) Brands Win Over Multi -Brand Retail Selling Ubiquitous Product

  • Expect continued brand disintermediation of traditional retailers, emphasis on unique brand crucial

Yet even a full-blown "rationalization" of the supply-side of the equation may not be enough, because while there is clearly a glut in retail space a just as dangerous trend is the ongoing collapse in total spending growth, which is a function of demand, and how healthy - or not in this case - the US consumer is.

Absent some rebound in this series, the Credit Suisse forecast will end up being optimistic.