Vacancies at US shopping centres have hit the highest level in eight years as the ecommerce revolution and recent collapse of debt-laden private equity-backed chains begin to ripple through the commercial property market.
In the latest sign that stress is developing in bricks and mortar retail, new figures from data provider Reis, an arm of Moody’s Analytics, show that 9.3 per cent of units in shopping malls lay empty at the end of March — a 10th more than a year ago.
Until recently, the robust US economy has helped the retail property market remain resilient despite the rise of online shopping. Landlords are still demanding 8 per cent higher rents in regional malls than they were five years ago.
However, thousands of store closures since the turn of the year, and signs that consumer spending is faltering, have made them increasingly concerned about the outlook for malls.
“We’re very cognisant of the pressure that Amazon is putting on a space,” said Beau Armstrong, chairman and chief executive of Texas-based Stratus Properties, presenting full-year results. “We focus more on the neighbourhood retail space as opposed to the big box, which is all but kind of dead, in my view, and in the malls, which is even a more complicated picture.”
Shopping malls have borne the brunt of a wave of closures announced so far this year. US retailers have set out plans to close 5,480 stores, according to Coresight Research — almost as many as the 5,730 announced in all of 2018.
Gap and Victoria’s Secret are among several household names to announce closure plans this year, while bankruptcy filings from retailers including Payless ShoeSource and Charlotte Russe have added to the pressure.
Within the past fortnight Hibbett Sports, a retailer based in Birmingham, Alabama, has said it plans to close 95 outlets over the next year. Scott Bowman, chief financial officer, said the “vast majority” of the sites targeted for closure were in “smaller towns”. “These small markets . . . are just too small for those stores,” he said.
Homeware retailer Williams-Sonoma, meanwhile, said it planned to close a net 30 stores this year. Julie Whalen, chief financial officer, said the company was taking a firmer line with landlords on rental terms. “We are pushing back with the landlords and being very aggressive with our stance,” she said.
Many of the retail companies that have failed recently, such as Toys R Us last year, had been backed by private equity, said Steven Tanger, chief executive of Tanger Factory Outlet Centers, a North Carolina-based real estate investment trust.
Speaking at a recent conference, he was critical of private equity groups for “taking great businesses with terrific brand names . . . and destroying them by adding an enormous amount of debt”.
He added: “That caused at least 20 bankruptcies in the past two-and-a-half to three years.”
The Reis figures also underline a widening gap between malls in better locations and those in economically struggling areas.
Rents at neighbourhood and community shopping centres rose 1 per cent or more from the previous quarter in 13 of 77 US metro areas, including San Francisco, San Diego and Las Vegas. In contrast, rents declined in 16, including Cleveland, Milwaukee and Little Rock.
“It’s a world of haves and have-nots,” said Victor Calanog, chief economist at Moody’s Analytics Reis.
He added that he expected the overall mall vacancy rate to breach the 2011 high this year. “I don’t see this trend reversing any time soon,” he said, adding that chains such as Sears “really haven’t adapted to the new reality”.
Mr Armstrong at Stratus Properties added: “We don’t think [bricks and mortar] retail is going to go away. We just think it’s going to evolve into something a little bit different,” adding that he expected sites to be smaller and sell “things that you just simply can’t get from Amazon”.
The property market data follow a batch of downbeat consumer spending figures this week. Retail sales fell 0.2 per cent month on month in February.
By: Alistair Gray in New York and Shannon Bond in San Francisco (ABQ Business First and The Financial Times)
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