Retail Investments – Falling from Grace?
With the increased impact of the internet on the retail world we are now seeing an increasing crescendo of change. Even in economic times as strong as the present we are seeing higher profile retail names fall victim to bankruptcy protection. Payless Shoes, hhgregg, The Limited, BCBG, Wet Seal, Gander Mountain are but a few of the higher profile names that have filed thus far in 2017. Its just a matter of time before some of the bigger names like Sears and JC Penney will be added to that list. Add to that list are the number of stores generally set to permanently close their doors, estimated to be 3,500 over the next several months.
During the recession in 2008 20 major retailers filed for bankruptcy, but that number is expected to be surpassed by the Fall this year. In 2008, private equity firms and banks rescued many of these dying retailers, but industry experts don’t seeing that scenario repeating itself this go-around as the investment community sees the underlying problems being structural rather that operational or transient. Shoppers’ habits are fundamentally changing, with visits to shopping malls declining for years with the rise of e-commerce and consumer shifts in how people spend their money. Between 2010 and 2013, mall visits declined by 50% according to one research study by Cushman & Wakefield. People are shifting their expenditures to restaurants, travel and technology.
All of this is happening when e-commerce represents less than 10% of retail sales. The rate of growth of ecommerce is 17% so that train has already left the station!
So how does that impact retail real estate. Well that depends on what kind of retail real estate we are talking about. There are at least six broad categories of retail centers:
• Small unanchored centers: generally rented by service retail (salons, dentists, etc) and restaurants and act to provide needed services to a localized market. Generally this kind of real estate is at low risk from the ecommerce affect, although their valuations (cap rates) may have some erosion since they may be “guilty by association”. These centers are usually of a smaller investment size so there is a greater pool of investors seeking this type of real estate.
• Grocery anchored centers: this medium sized retail center will usually have 70-80% of their size taken up by a grocery store with the balance being service retail and restaurants. This type of retail is also of lower risk since grocers have a staunch hold on their market share and will continue to do so despite attempts for home delivery of food and internet shopping. One of the keys to this kind of property is that it shouldn’t have too large of a square footage of other retail space as there are only so many hair salons and pizza parlor type of uses to fill those spaces.
• Big Box/Power Centers: These types of properties generally have 3-10 large ‘big box’ stores…’category killers’ like Best Buy, Bed Bath and Beyond, Toys are Us, etc. This is a fairly high risk investment and should command a higher cap rate (although they really haven’t traditionally under the guise of strong credit tenant leases). There are at least three types of risks with these properties: ecommerce is eroding the sales of the big box retailers at a faster rate, especially those that haven’t adapted a strong internet strategy. Secondly, by the nature of the size of these individual stores and the relatively small number of big boxes in the center, the power center can drop from a 100% occupancy to a 70-80% occupancy, basically break-even, with the loss of just one big box tenant. Thirdly, given the size of these stores it is difficult if not impossible to convert those spaces into smaller sizes.
• Malls: Of course malls get all the press despite being a small component of the entire retail scene. They are probably of the highest risk because of the nature of their tenant base. The anchor department stores are all under great pressure whether it be Sears or Saks. The inline stores are usually soft goods (clothing and fashion) which are particularly under pressure from both the internet as well as the inherent whims of fashion.
• Stand Alone Retailers: typically these are single tenant properties leased to national retailers and restaurants such as Home Depot, Dollar General, Taco Bell, Autozone, Walgreens, etc. Some are relatively immune to ecommerce or have adapted their model (like Home Depot) and some are not. The risk can be low or high just depending on the category and the credit of the tenant.
• Other: There are lots of hybrids our there from tourist specialty centers, outlet malls, downtown ‘high street’ retail, lifestyle centers etc. These would have to be viewed individually as to their merits and risks, but like mentioned before cap rates can be subject to the ‘guilty by association’ effect.
For more information on retail sales and leasing please contact Dougall McCorkle.
Premier Commercial Inc. – lic. Real estate brokers