Recent store closings only a taste of the future


Tuesday's news of Sears closing its flagship downtown Chicago store comes on the heels of closings announced by Macy's and J.C. Penney, and is followed by today's word of job cuts at Target HQ.

These are just the beginning (continuation really) of a wave of similar actions likely to cause an average shrinkage in overall retail square footage of between one-third and one-half over the next 5-10 years, says Excess Space Retail Services' Michael Burden.

"Stores are making a long-term bet on technology," says Belus Capital Advisors analyst Brian Sozzi. "It simply doesn't make strategic sense to enter a new 15-year lease as consumers are likely to continue curtailing physical visits to the mall."

Keep an aye on the shopping center vacancy rate. It rose 550 basis points to 11% in the Great Recession, but has since recovered to just 8.9%. Will it make a higher high in the next downturn?

Within the closings is another trend - indoor malls are faring worse than outlet centers, outdoor malls, or stand-alone stores. Without a major reinvention, says Rick Caruso of Caruso Affiliated, traditional malls will go extinct. He's unaware of an indoor mall being build since 2006. "Any time you stop building a product, that's usually the best indication that the customer doesn't want it anymore."

Retail space REITs: O, NNN

Mall REITs: SPG, GGP, BRX

Shopping center/outlet REITs: ROIC, RPAI, IRC, KIM, FRT, DDR, SKT, WHLR

Comments (27)
  • johnjross
    , contributor
    Comments (39) | Send Message
     
    Within the last twelve months three new stores have opened in a newly constructed strip mall -Dicks, Bed Bath and Beyond and Petsmart. A Cabbelas is under construction. This activity does not fit with the implied end of retail space. Most of the announced closures are older properties in the Northeast and Midwest.
    22 Jan 2014, 06:19 PM Reply Like
  • june1234
    , contributor
    Comments (4252) | Send Message
     
    Everybody and their brother is short retail these days
    22 Jan 2014, 06:26 PM Reply Like
  • Lakeaffect
    , contributor
    Comments (1422) | Send Message
     
    Makes sense. For the price of the fuel, you can order it from the comfort of your home and get it delivered a day or two later. No more chasing from one store to another looking for something and find it's out of stock. No more dealing with surly customer service people who don't know anything about the product and don't really care either.

     

    Returns are much easier online as well.

     

    Bricks and Mortar stores are going the way of the dinosaur. The ones that haven't figured out how to make the internet work for them won't be around in 10 years. What goes around comes around, eh Walmart?
    22 Jan 2014, 06:56 PM Reply Like
  • purpleboarder
    , contributor
    Comments (411) | Send Message
     
    Speaking of Walmart, have you looked into their recent efforts to combat Amazon online? It's on the way...
    22 Jan 2014, 08:45 PM Reply Like
  • TAS
    , contributor
    Comments (3692) | Send Message
     
    Yes...and it is great for consumers.

     

    If you are an ex-pat and fond of a region's food (like Chicago hot dog sport peppers and giardinera, for instance), Wall-Mart has the right product, cheap with prompt, cheap shipping.

     

    I love it.
    23 Jan 2014, 01:26 AM Reply Like
  • Brad Castro
    , contributor
    Comments (1402) | Send Message
     
    Interesting.

     

    My dream has long been to buy the bulk of my groceries online. I believe/hope one day that will be a practical reality (i.e. I don't want to double my grocery budget to make this happen). I've assumed Amazon would be the eventual vehicle for this, but it makes sense that Walmart could have a pretty big advantage if they chose to aggressively expand in this area.

     

    Unfortunately, the convenience comes with a significant premium.

     

    Case in point - taco seasoning. WMT's online offering is a 24 pack of either McCormick or Lawry's (both owned by MKC) - the McCormick brand is $29.61 and the Lawry's brand is $21.66. That works out to be roughly $1.23 and $0.90 per individual unit respectively.

     

    A fair store price is more along the lines of about $0.50.

     

    With the constant pressure AMZN is putting on quick and affordable deliverability, I have to believe that gap is going to begin to close.

     

    And the sooner the better. I have to believe that branded packaged food companies will see direct deliverability as a way to combat the threat of private label and look to promote or encourage the trend.
    23 Jan 2014, 02:38 AM Reply Like
  • 21thomas99
    , contributor
    Comments (411) | Send Message
     
    'For the price of the fuel, you can order it from the comfort of your home and get it delivered'

     

    Doesn't the price of fuel for delivery get priced into the delivery charge? So much for saving money on gas.
    23 Jan 2014, 09:59 AM Reply Like
  • TAS
    , contributor
    Comments (3692) | Send Message
     
    I beg to differ on your fifty cent price for McCormick taco seasoning. You have a hard time buying a generic wannabe for fifty cents.
    23 Jan 2014, 10:25 PM Reply Like
  • Brad Castro
    , contributor
    Comments (1402) | Send Message
     
    I'll have to double check to get you an exact price on McCormick, but I just checked a recent receipt (yes, I'm that anal) and the Lawry's seasoning was $0.62 each.

     

    On an everyday price, you may be right that $0.50 is too low, but it's an item that I see in-store promotions for pretty regularly - buy 1 or 2, get 1 free - buy this item, get the seasoning for free.

     

    Re: private label, I've seen the taco seasoning promoted on occasion @ 3 for $1.

     

    Where I shop - HEB in Texas - they're pretty aggressive on prices. They ran Albertsons out of Austin a few years ago, largely on the basis of price (OK - there was also a really weird smell at the Albertsons closest to my house).

     

    Regardless, buying online and in bulk still isn't close to being comparable to buying in person (unfortunately). With the Lawry's example, in my case, buying online represents a 45-50% premium ($0.90 vs. $0.62).
    23 Jan 2014, 11:04 PM Reply Like
  • williamwilliam
    , contributor
    Comments (666) | Send Message
     
    One third of the US counties reported declining populations in the last census. There will not be common retail behavior from county-to-county, state-to-state. Personally, I checked the population (and crime) statistics of the two areas I own real estate in. And I just bought a third property. This is not rocket science.
    22 Jan 2014, 07:15 PM Reply Like
  • The_Hammer
    , contributor
    Comments (5027) | Send Message
     
    <<Bricks and Mortar stores are going the way of the dinosaur>>
    yes america is over retailed but a bunch of non-sense.
    22 Jan 2014, 07:32 PM Reply Like
  • charlottecarter
    , contributor
    Comments (4) | Send Message
     
    i live near sarasota and they are building a large indoor mall there; the lack of mall construction around can be attributed to the economy ,which we all know went into a recession in 2006 and after, and the lack of construction financing for many years thereafter; it is just now starting to thaw and we see a lot of commercial construction popping up everywhere; of course, location and economic conditions will also be factors into where new mall construction go
    22 Jan 2014, 07:55 PM Reply Like
  • cwebb2327
    , contributor
    Comments (3) | Send Message
     
    "Any time you stop building a product, that's usually the best indication that the customer doesn't want it anymore." is simply wrong, and not the conclusion one should draw from hiatus of building new regional malls. One might reasonably have serious doubts about the expertise of someone who would make such a statement. A better explanation is saturation, and is part of any industry's cycle. Specific to enclosed malls, there are still regional mall target sites in major growth areas that have been shelved pending demand. In addition, existing strong well positioned and well run real estate, malls included, will evolve with the changing market conditions and customer demands, not disappear.
    22 Jan 2014, 07:59 PM Reply Like
  • Bouchart
    , contributor
    Comments (1076) | Send Message
     
    The problem with indoor malls, in my experience, is that most of them have exactly the same stores, so that if you've been to one, you've been to them all.

     

    Also these store closings don't bode well for anyone thinking that SHLD will be some sort of commercial real estate play.
    22 Jan 2014, 08:28 PM Reply Like
  • Captain Pike
    , contributor
    Comments (890) | Send Message
     
    You are right, it's the old traditional indoor malls and poor retailers who did not keep up and improve. Most of those locations are depressing places with nothing worth seeing. However places like Cabela's, Bass pro shops, Apple, and high end destination outdoor malls are the new way. If a place is interesting and fresh people will go, if it is dull and dirty, forget it.
    22 Jan 2014, 09:33 PM Reply Like
  • positivethoughts
    , contributor
    Comments (2064) | Send Message
     
    Exactly. With indoor malls, they only cater to young people. If you are over the age of 25 and care more about your home, your vehicle or some other category, you arent going to venture to a mall that has nothing but clothing stores.
    22 Jan 2014, 10:56 PM Reply Like
  • KJP712
    , contributor
    Comments (469) | Send Message
     
    Malls need a new infusion of ideas.Start with animal creatures roaming the corridors for the kids,that sort of thing.Some sort of train to ferry people around and get rid of the jaded , cynical sales clerks.Bring in new fresh faces excited to come to work every day.I was in a JC Penney recently and saw only tired faces frowning down on a sunshine day.If malls do not change they Will go the way of Drive-In theaters possibly within 5 years.
    22 Jan 2014, 09:29 PM Reply Like
  • zapbranniganster
    , contributor
    Comments (7) | Send Message
     
    When I go to Tysons Corner Mall in the DC suburbs, it is frequently packed with people and it is hard to get a seat in the food court. While this may be an exception, it looks to me like people will need a place to go to get out of the house, and malls fill a need. People may buy less at the mall, but I doubt they will stop going.
    22 Jan 2014, 09:36 PM Reply Like
  • User 509088
    , contributor
    Comments (1673) | Send Message
     
    indoor malls these days are like zoos were when I was little, a place to go to stare at stuff.

     

    the high end stores sit in their anchor sockets, frowning at the majority of people like security guards at the entrance to a high end bank.

     

    if there's no money for consumers (aka workers) to buy with, then consumers will walk the malls without buying.
    22 Jan 2014, 11:33 PM Reply Like
  • TAS
    , contributor
    Comments (3692) | Send Message
     
    Excellent analogy regarding zoos and malls.

     

    My take is that malls are being over run with primates. I shop online.
    23 Jan 2014, 01:29 AM Reply Like
  • bale002
    , contributor
    Comments (434) | Send Message
     
    I generally avoid retail/mall REITs and focus on warehousing/distribution, but, as others have mentioned, it is not realistic to make a sweeping generalization about brick-and-mortar retail throughout this vast continent, and some REIT management teams, like O, should be able to manage the risk of decline in certain regions.
    23 Jan 2014, 04:09 AM Reply Like
  • june1234
    , contributor
    Comments (4252) | Send Message
     
    While holiday retail sales took it on the chin online ones grew like 16% they said. Its not complicated. Why would I pay my cell carrier 1/3 to 50% more to upgrade to the same new phone I can buy from AMZN for 1/3 to 50% less, same exact phone, same condition. And with AMZN they give me 30 days not 2 weeks to return it if I don't like and they don't charge me a restocking fee if I do return it. Its not complicated
    23 Jan 2014, 04:24 AM Reply Like
  • Minutemen
    , contributor
    Comments (2266) | Send Message
     
    Not sure why Realty Income (O) was included in this article. Realty Income focuses primarily on free-standing buildings with large commercial enterprises, not indoor shopping malls. In any case, I fail to envision the U.S. as a barren wasteland of empty box stores and malls (unless of course you already live in a barren wasteland).

     

    Realty Income's Top 15 holdings:

     

    FedEx (5.1 %)
    Rite Aid (2.2 %)
    Walgreens (5.0 %)
    Dollar General (2.2 %)
    Family Dollar (4.9 %)
    Regal Cinemas (2.1 %)
    LA Fitness (4.2 %)
    CVS Pharmacy (2.1 %)
    AMC Theatres (3.1 %)
    The Pantry (1.8 %)
    Diageo (3.0 %)
    Circle K (1.7 %)
    BJ's Wholesale Clubs (2.9 %)
    Walmart/Sam's Club (1.6 %)
    Northern Tier Energy/Super America (2.5 %)
    23 Jan 2014, 08:48 AM Reply Like
  • John Alford
    , contributor
    Comments (236) | Send Message
     
    Thought your point exactly when I read the article. Thanks for posting the tenant's list-while not bullet-proof, these are the kind of stores that are seeing better traffic than the Sears/JC Penneys implied in the article.

     

    My local FEDEX sees a steady if not overwhelming amount of business and at certain times the LA Fitness takes up half it's center's parking lot. I don't know if either mall is held by O but those are good signs. I'm long O and a fan-see article here: http://seekingalpha.co...
    23 Jan 2014, 09:25 AM Reply Like
  • Minutemen
    , contributor
    Comments (2266) | Send Message
     
    Thanks, John. And thanks for providing the link to your article. I like O for its strong diversity in holdings, its long-term leases (10-20 years), the outstanding management, and of course its monthly dividends and history of dividend growth. Long O.
    23 Jan 2014, 09:34 AM Reply Like
  • Investment Pancake
    , contributor
    Comments (1417) | Send Message
     
    Seems like good news - getting all the big deadwood anchor tenants out (like Sears, JC Penny), with their low, locked-in rental contracts, and replacing them with newer, fresher tenants at higher rents. I mean, really, who goes to a shopping mall to buy goofy sweatpants and a low quality lawn mower from Sears? Nobody, right? That's just wasted space, subject to a twenty year old rental contract. If I ran a large shopping mall, I'd be looking to rent out the space that JC Penny used to occupy to Whole Foods, Louis Vuitton, Apple, or a bunch of smaller retailers that offer products people actually want to buy. I'd know that would increase foot traffic at the mall, and I could raise the rents.
    There's a long-overdue roll over in the retail space. It could spell doom for shopping malls, but I doubt it. More likely, it spells "out with the old, in with the new."
    23 Jan 2014, 09:09 AM Reply Like
  • JpDiamond
    , contributor
    Comment (1) | Send Message
     
    Long on O here...
    23 Jan 2014, 07:57 PM Reply Like
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