A sad farewell

pumpkinpatchFor many investors in retail property, the end of the Christmas retail season, including the January clearance sales, is a good time to close your eyes and block your ears. What you often hear sounds awful, because after the season to be jolly always comes the season to be plagued by store closing announcements.

This happens every year and everywhere in the world, without fail. Some of the store closings just amount to the prudent editing out of a few unprofitable stores from otherwise healthy portfolios. At the other end of the continuum, they involve the total liquidation of retail chains. In many of these cases, the decision was already made before the Christmas holidays began and the doors were only kept open to take advantage of one last peak season.

In between the two extremes – delicate portfolio pruning and total liquidation – are retailers that are to one degree or another struggling for relevance in discretionary spending sectors that are being pressured by changing consumer lifestyles and sharper competition. Some have already lost the battle but the e-suite doesn’t know it yet, or won’t own up. These are the catastrophes of next year and the year after.

This year, the store closing stories have become shriller. The fashion sector has come in for a particular heavy beating just about everywhere. In Australia, Marcs, David Lawrence, Herringbone and Rhodes & Beckett are high-profile casualties in the fashion sector. They followed hard on the heels of Pumpkin Patch and Payless Shoes.

Elsewhere, the situation looks even more dire. In the US, the department store and fashion specialty sectors have been ravaged. The Limited, an iconic American fashion brand, is being liquidated in its entirety with the loss of 250 stores, mostly in regional and super regional shopping centres.

DavidLawerenceAmerican Apparel, another high-profile brand, has also run up the white flag – another 110 stores gone.

Then there is Wet Seal, a national teen girl apparel retailer with 171 stores, all of which will be closed under bankruptcy proceedings.

Department stores are also closing at rapid rate – Macy’s is closing 68 stores, Sears 42 and Kmart 108. JCPenney is currently reviewing its portfolio and could plausibly close hundreds of stores over the next couple of years.

The property point-of-view

What does all this mean from a retail property standpoint? Does the ramping up of store closures signal anything particularly adverse in the making for shopping centres and strips?

Vacancy

It doesn’t seem to matter how many store closure and retailer bankruptcy announcements are made – vacancy at shopping centre industry level doesn’t seem to alter much over time, unless you think a few percentage points swing between the bottom and the top of a real estate cycle is a big swing.

In Australia, occupancy has historically stayed up in the mid-high 90 per cent area for most shopping centre types. In the US, the retail vacancy rate was only about 250 basis points lower at the bottom of the Great Recession than it is now. Clearly, vacancy has not been greatly affected by the number of store closures, at least not at an industry level. There are, of course, variations in the impact on centres according to their relative quality.

Rent

Rent has, does and will adjust, beginning with the lower-quality properties and trickling upward. Average retail rental growth has now flattened out in most Australian state capitals, except in WA where it has fallen materially. In the US, where store closing activity has been more aggressive, rents are now beginning to feel the pinch and have been falling slightly since the middle of 2016.

Tenant quality

For shopping centres unable to attract the higher profile international retailers, the accelerated store closing activity by domestic retailers inevitably means a deterioration in tenant quality as local chains and independents have to plug the gaps.

Tenant categories

The Australian shopping centre industry, like that in the US, has been burdened by the problem of over-reliance on apparel. This is now a category in declining demand for a number of well-known reasons. Among them: consumers have become more frugal, more experience-oriented, less driven by fashion mega-trends, and, due to social media, more motivated to improve their appearance in ways not related to what they wear (such as. through health and beauty products).

An uncertain future

Things are not going to get any easier for fashion retailers that are only just hanging in there. In Australia, international fashion retailers are expanding out of their CBD beach-heads into suburbia. Buying fashion online is not showing any signs of slowing. And in America, Amazon is already set to become the largest apparel retailer this year (of course, Amazon is coming to Australia, further promising to ramp up pressure on our existing retail fashion base).

New categories are rising to take the place of fashion in shopping centres – health and beauty, food service and personal services are all growing.

marcsWill these new consumer segments be enough to fill all the spaces vacated already and soon to be vacated by fashion retailers? Historically, the industry has shown an amazing ability to adapt and go on. It would be unwise to bet against it to do the same. However, we are still in for a time of slower growth and greater uncertainty.

Meanwhile, expect the annual ritual of store closing announcements to get ever louder, even if it might not quite portend the catastrophe it seems.

Michael Baker is a Sydney-based retail consultant and former head of research at the International Council of Shopping Centers. [email protected]

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