The Death Of Retail Real Estate Continues: 77MM Sq.Ft Of Shopping Space Closed In 2018 Already

Retail real estate carnage is going to continue this year with no signs of slowing up, as Bloomberg reported this morning that over 77 million square feet of retail real estate has closed this year and that 2018 will easily pass 2017's record of 105 million square feet closed. The latest example was the fall of the once massive Toys 'R' Us name:

The fall of the Toys “R” Us chain, with more than 700 U.S. stores, shows how much retail real estate has changed in just the last decade. When KKR & Co.Bain Capital, and Vornado Realty Trust took over the company in 2005, the buyers justified the $7.5 billion price, in part, because of the supposedly valuable properties that came with the deal.

If there was ever to be any silver lining to the complete carnage in the retail real estate space, it was the argument that has been perpetuated over the last decade or so: despite retail stores closing, the real estate would eventually be worth something.

This argument was made by real estate investment trusts as well as activist investors and analysts who tried to put a positive spin on the death of brick and mortar retail. Now, with more space freeing up, the bid under former retail property is at ask of falling off as supply is starting to get far ahead of demand:

Real estate can put a floor under the value of a retailer and make it easier for the company to borrow. Maybe a particular store concept doesn’t work out as consumers’ tastes change, but in that case, investors can always sell the land and buildings to someone with a better plan. Long-term leases can be similarly valuable. But what if the problem isn’t that a particular store is out of fashion, but that consumers are just shopping less at brick-and-mortar retailers in general? As more storefronts empty, the valuation floor will look wobblier.

This pace of closings puts 2018 on pace to pass 2017's record of 105 million square feet of retail space closed:

At last count, U.S. store closures announced this year reached a staggering 77 million square feet, according to data on national and regional chains compiled by CoStar Group Inc. That means retailers are well on their way to surpassing the record 105 million square feet announced for closure in all of 2017.

It doesn't look like the pace of these closings is going to slow anytime soon, either:

And with shifts to internet shopping and retailer debt woes continuing, there’s no indication the shakeout will end anytime soon. “A huge amount of retail real estate in the U.S. is going to meet its demise,” says James Corl, managing director and head of real estate at private equity firm Siguler Guff & Co. Property owners will “try to re-let it as a gun range or a church—or it’s going to go back to being a cornfield.”

So goes one set of stores, as go others. Despite the fact that the U.S. still has some of the most square footage of shopping space per person, there isn't enough being spent at these locations to make them worth it:

Even though retailers have been retreating for years, the country still has about 24 square feet of shopping space per person, many times more than any other developed nation, according to research firm Green Street Advisors. Consumers aren’t spending enough offline to support such a generous amount. Vacancies are headaches for landlords, of course, but they also have a mushrooming effect. People may steer clear of a mall that has lost an anchor tenant or has an abundance of “for lease” signs in smaller spaces. Deserted big-box stores, their facades naked and parking lots barren, can spread a sense of blight for blocks around. Who wants to open a business next to a place that’s gone out of business?


The article finishes by pointing out that companies like Amazon and Whole Foods have still seen success using a brick-and-mortar retail concept. It’s possible that the space is simply just downsizing and becoming more efficient instead of disappearing entirely. Regardless, there seems to be a long runway to go in terms of retail real estate freeing up over the next couple of years. The trend of internet versus department stores also remains anything but encouraging. 

And the outlook, with overlevered companies and lack of a serious bid under property prices, continues to look grim. Retailers are not going to be able to refi or recapitalize in ways necessary to try and grab onto lifelines. As the sector continues to collapse it's going to be harder and harder to try and engineer turnarounds - this could lead to a self fulfilling prophecy of accelerating turmoil and collapse for the industry:

But not every deserted retail property can be turned into a gym, theater, or boutique outlet of a tech company. That reality will weigh on any investor thinking about scooping up a struggling chain with real estate assets today—especially buyers in private equity, who borrow heavily to finance their deals. “Retailers cannot support large debt loads,” says Perry Mandarino, head of restructuring at B. Riley FBR, an investment bank that’s worked on retail liquidations. “Add to that the possibility of a decrease in the value of other collateral, such as real estate, and the successful execution of a retail-leveraged buyout may be almost impossible.”

Almost a year ago to the day, we reported on retail closing setting up to hit a scorching pace in 2017. The narrative for 2018 stays the same, only worse. In early 2017 we pointed out the astonishing fact that "Barely a quarter into 2017, year-to-date retail store closings had already surpassed those of 2008." 

We asked in early 2017 if Amazon was assured of becoming the world's first trillion-dollar stock, perhaps hitting the milestone even before Apple? Here is how the two names have fared since then:

The race is on.

Others have given up waiting for a recovery that seems always out of reach and are settling into what appears to be the new normal - but regardless, 2018 is setting up to, one again, break new ground in misery for retail real estate. 

Comments

HockeyFool cheka Wed, 04/18/2018 - 07:09 Permalink

The daily jobs cut spammer says "its still a mess out there."

So for the first time I looked at his site. I live in Michigan and this caught my eye, listed on the "daily job cuts" list:

Grand Traverse Pie company in Petoskey is closing.

Petoskey is a really nice tourist area and mostly a high rent district on Lake Michigan. There are very few if any empty retail spaces downtown and the ones that open up, are snapped up right away.

Click the link, the article says the business has "out grown its current location." That doesn't sound bad.

And there is already another business ready to move in and open a new restaurant. That doesn't sound bad either.

Sounds like the daily jobs cut spammer is full of shit and is padding his list. Or not bothering to read his own site?

In reply to by cheka

techpriest Oliver Klozoff Wed, 04/18/2018 - 00:42 Permalink

I am planting loads of lavender, mint, and building a dehydrator, and the plan is to make soaps, massage oils, and lip balm with extracts from the garden. I might also pot the mint that keeps sprawling out of its place, and sell that to interested folks. I might just come out with enough to make a stall at the farmer's market pay for itself, and for <$250 up front for bottling equipment it isn't an expensive income stream.

At the very least, its a hell of a lot more interesting than whatever memes are flying around Facebook. John Taylor Gatto wrote about how cheap oil/coal was meant to liberate humanity by making goods so cheap that you wouldn't need to work much to meet your needs, but the public school system and TV have worked to make people so unproductive that this opportunity was missed.

In reply to by Oliver Klozoff

Endgame Napoleon Shocker Wed, 04/18/2018 - 09:00 Permalink

It is sad that the managers in those retail businesses lost one of the rare jobs that actually covers a full range of household bills, including rent, without the need for a spousal income or pay from government for having sex and reproducing out-of-wedlock. The other employees of the vanquished retail stores just lost part-time jobs at low wage levels, including in the upscale stores. The vast majority of managers have spousal income, though, and because they have kids, are said to “need the money,” so at least, they have a second income to fall back on.

Seems to me that, with half of single males between 18 and 34 living with parents in adulthood, due to rent that consumes more than half of earned-only income, and with many non-womb-productive / non-welfare-eligible, single women doing the same, we have a severe shortage of affordable apartments in areas where people wish to live. Many malls are located in such areas. They are often in safe areas, close to interstates to accommodate long commutes to low-wage jobs. If our crappy politicians wanted to solve a real problem, they would facilitate converting that mall space into affordable apartments.

But if it can’t be attached to baby imagery or politically expedient pandering to factional groups, politicians are not interested in any way. Earth to politicians: Many of the  LIKELY voters are the older parents of these underemployed adults, living in their homes, and many of the people your policies pander to are not even registered to vote and will never bother to stand in a long line to vote.

In reply to by Shocker

jin187 Number 9 Wed, 04/18/2018 - 01:55 Permalink

Thinking like this is why we have pointless kneejerk retard elections.  I sent that guy to D.C. 6 months ago, and he still hasn't fixed the country?  Time to bring back the guys we just got rid of!  About the only economic things you can blame Trump for that will bear fruit before he leaves office are the tariffs and other global trade decisions he makes.  Regulation and tax changes won't cause any big shifts in the economy for at least another 3-4 years minimum, just like we haven't really felt the pain of Obeezycare yet.

That bill will be coming due soon BTW.  In a few years, the average family will be paying our GDP per capita a year for a decent silver plan, and half the country will either have to go uninsured, or get full subsidies, forcing the choice between single payer and repealing Obeezycare, which was their plan all along.

In reply to by Number 9

Kickaha jin187 Wed, 04/18/2018 - 07:22 Permalink

The main article was about the impact of Obamacare, although the author mistakenly attributes vacant brick and mortar retail exclusively to online shopping.  No reason to assign just one reason.  This new concept of having the federal government use the IRS to fine people who won't allocate enough of their budget to health insurance has worked to a considerable extent out in the hinterlands.  People who used to have money to spend on shopping and dining out now have none.  It's all been spent on the monthly health insurance premium.  Around here I'm seeing vacant stores fill up with medical clinics and educational businesses, which should be no surprise, as by government policy those businesses are being encouraged to expand and are funded by mandatory insurance and government guaranteed loans which are pretty much unaffected by the market conditions impacting retail stores.

In reply to by jin187

Oldwood hector zeroni Tue, 04/17/2018 - 23:17 Permalink

A conjured economy needs fake demand to sustain infinite consumption growth.GROWTH that can not be sustained naturally which demands growth in debt and continual rationalization to enable us to do what we KNOW in our hearts will destroy us.

 

What WOULD we buy without advertising, indoctrination and coercion? 

How would you know what you WANT?

In reply to by hector zeroni

techpriest karenm Wed, 04/18/2018 - 00:44 Permalink

True, but if we don't blame Amazon, how can Congress justify new regulations to control the Internet?

Speaking of Congress, when Chuck Grassley was grilling Mark Zuckerberg, they were talking about regulations and Grassley asks "Could you help us write the regulation?" In other words, pretend to hate on the Zuck, but Congress is going to have his team write up the social media regulations. Isn't that funny?

In reply to by karenm

jin187 yogibear Wed, 04/18/2018 - 02:11 Permalink

The problem isn't that people aren't fit for college, or that college is worthless, it's that they're being sold on going to college to reach for a dream, instead of going there to get the skills that pay the bills.  You can go to your local community college, and get HVAC, plumbing, and other high value certs for less than what a semester at a university would cost.

In reply to by yogibear

PT Tue, 04/17/2018 - 22:58 Permalink

No manufacturing, no retail.  Never mind, you still have Amazon.

You'll never see those shelves go empty.
Then one day the deliveries will stop.

Oldwood PT Wed, 04/18/2018 - 03:31 Permalink

No, they are not full, but regarding warehouse space, nearly. Searched to buy and gave up as the few available were asking too high in my book. Ended up leasing and that was miserable as no one seemed in a hurry to do anything and either were very proud and asking for five year minimum lease, or reasonable priced but unwilling to make any improvements.

The building I just sold for $900k, I paid $300k in 2000. And we're talking a 60year old building

Brokers say it's never been hotter or higher market. Record small percentage vacancies and record high prices.

In reply to by PT