Despite the retail industry continuing to struggle with rising vacancies due to big-box and department store closures across the nation, retail real estate’s fundamentals have remained strong. Mall operators continue to adapt to the changing landscape, and high-traffic, urban metro markets remain the best-performing in the sector. However, retail's red-headed stepchild – the strip mall – has emerged as a leader for the sector, second only to high street opportunities in performance.
By Jerry Heaton, Senior Managing Consultant, Dallas
The article below was published several years ago, and not only have the predictions come true, they have been surpassed more than anticipated. So far this year, the number of retailers filing for Chapter 11 Bankruptcy is headed toward the highest annual tally since the great recession, per Moody’s distressed list. Amazon is about to unseat Macy’s as the largest seller of clothing. Shopping malls are becoming extinct with Macy’s, Sears and JCPenney all hanging on by selling off real estate assets and closing stores. Just this month, two more women’s and teen apparel chains – Bebe Stores Inc. and Rue 21 Inc. – announced plans to shutter hundreds of stores in shopping centers across the nation. And while Amazon already dominates the book and electronic industry, they’re taking on big box grocery stores next.
As brick-and-mortar retailers continue to be squeezed out by Amazon and its online competitors, shopping center owners are continuously looking for creative solutions to their anchor tenant problems. While major grocery chains, movie theatres, restaurants, tech companies, and condos are being regularly implemented into the multi-use shopping center trend, health-care is the latest big tenant option to emerge. The health-care industry is moving away from centralized campuses to bring services closer to patients at a time when two key demographics – boomers and millennials – are entering prime years for consumption. For the health-care companies, softness in the retail market has helped them negotiate favorable leases, including improvement allowances. Medical facilities also look good financially as tenants, with credit profiles that stack up well compared with nail salons and fast-food restaurants.
Retail landlords are starting to feel the pain of their struggling tenants. Macy's, Nordstrom, J.C. Penney and other department stores last week reported another quarter of crummy earnings and warned that declines are expected to continue. Chains such as Nordstrom said they were re-thinking plans to open new stores, and others are likely to follow suit. Meanwhile, bankruptcy filings by Sports Authority, Pacific Sunwear and a rash of other retailers in the past year -- coupled with planned store closures by Macy's, Walmart, and other chains -- has already led to the highest number of store closures since 2010, according to commercial real estate firm Cushman & Wakefield.
After several retailers succumbed to filing bankruptcy this year, many owners of malls and shopping centers were left scrambling to fill vacancies. Some landlords, however, found the silver lining. The vast majority of these type of properties are occupied and spare space is in short supply in many parts of the country, according to experts and landlord data. Because of this, optimistic landlords are willing to take a ‘calculated gamble.’ Rather than letting another retailer buy the leases and start paying rent immediately, some REITS will buy leases of struggling tenants and let the space sit open while they find new tenants they can charge higher rents.
Energy benchmarking for large commercial buildings is fast becoming U.S. law. According to The International Council of Shopping Centers (ICSC), ten cities — Austin, Texas; Boston; Cambridge, Mass.; Chicago; Minneapolis; New York City; Philadelphia; San Francisco; Seattle; and Washington, D.C. — have enacted energy-benchmarking requirements, as have the states of California and Washington. This year Montgomery County, Md., became the first county to pass such a law, mandating a benchmark deadline of Dec. 1, 2016, for private buildings measuring at least 250,000 square feet and a deadline one year later for those measuring at least 50,000 square feet.
The performance gap between strong class-B malls and struggling ones continues to grow by the day. According to the National Real Estate Investor, while malls with little competition are experiencing increasing market rents, class-B malls in larger markets that are competing against other properties are losing tenants and struggling to stay afloat. Weak performance of anchor tenants such as Sears and J.C. Penney has already challenged occupancies and rental rates at many class-B malls, especially. Another challenge facing the sector is that in addition to competing with other malls to retain tenants, mall owners are also competing against open-air centers, who have been receiving greater interest in their properties over traditional mall tenants. Lastly, investor interest is low for class-B properties, as many traditional investors are shying away from the sector.
By Michael Clary, Senior Managing Consultant, Detroit
By Jodi A. Bain, Senior Managing Consultant, Tucson