What’s the Current Reality of Retail Real Estate? It Depends upon what Prism You are Using

The Large Upcoming Annual ICSC RECON Event in Las Vegas is to be held May 21-24,

Therefore the question which must be asked is:

Where does the reality lie for this sector of the commercial real estate market?

ICSC is a Trade Organization; from their Website:” The purpose of The International Council of Shopping Centers (ICSC) is to advance the shopping center industry and to promote its role in the commercial distribution of consumer goods and services…”

As Trade Organizations are mandated to do, Their Mission is protect and advocate for their membership, The ICSC is no different. During the difficult times in the economy especially after the 2008 economic meltdown, it is rare this particular Trade Group will admit to what common sense is telling the world, that retail sales are down, vacancy rates are going up and rental rates are declining commensurate with the market conditions. That is certainly the case in this current period of extreme change in consumer buying habits.

They and some of their economists will describe the market as doing much better on a National level than what are most stakeholders perceptions. Actually, using National Data to describe vacancy and market rental rates and so forth is terribly misleading and has always been. Macro Data can tell the observer of trends and not much else. But what it does not do is describe the what is going on at 30,000 feet below at ground level.

Today’s Business News Headline as I am about to send this out…

Retail REIT execs say industry troubles are exaggerated

 

In earnings calls for this quarter, retail REIT executives are pushing back against the narrative that the retail industry is in a downward spiral, arguing that most of the sector is doing well, with strong leasing and shopper foot traffic and rising rental rates. “We’re frustrated only by the

narrative, but not by what’s happening in our business,” says Simon Property Group CEO David Simon. (5/1)

N.Y. retail landlords reassess as vacancy rates rise

Average rents for ground-floor retail space in all but two of 11 high-profile New York City districts dipped in the first quarter, and vacancy rates rose, according to Cushman & Wakefield. Rents rose dramatically after the recession, and some landlords are offering incentives such as rent-free periods and contributions toward build-out to woo new tenants.

The Wall Street Journal (tiered subscription model) (4/30)

These Five Department Stores Shed $4.2B in Market Value This Week

“It’s the shift to online that’s socking these stocks as the companies rush to slim store count, streamline their operators and leverage mobile platforms and digital technologies.”

From NREI (May 11, 2017) electronic daily email edition the following article was featured… here is the Headline

RETAIL   Store Closing Data Looks Foreboding for Malls

Fung Global researchers found that year-to-date in 2017, store closing announcements in the U.S. increased by 97 percent year-over-year, to 3,296 locations.

This article goes on to say despite While there has also been a 20 percent year-over-year increase in store opening announcements, to 2,573 locations, that’s not going to create anywhere near enough demand to fill all the newly empty spaces coming on the market. According to a recent report from real estate services firm JLL, department store closures alone will result up to 37 million sq. ft. of newly vacant mall space this year.

Another perfect example of this disconnect just from last week I received in a daily Commercial Real Estate aggregator site I subscribe to called SmartBrief, two articles dated one (1) day apart the had the following Headlines in the same email.

From the Atlantic Magazine

The Great Retail Apocalypse of 2017:  4_10_2017

What in the World Is Causing the Retail Meltdown of 2017?

In the middle of an economic recovery, hundreds of shops and malls are

shuttering. The reasons why go far beyond Amazon.

From www.Econday.com:  First-quarter consumer spending is in trouble. Retail sales fell 0.2 percent in March which is under the Econoday consensus for no change. Importantly, February sales are revised sharply lower, to minus 0.3 percent vs an initial gain of 0.1 percent.

Anyone reading this Newsletter can look-up all the above, as I have provided links to all these reference articles.

NPD Group, meanwhile, expects traffic will be flat this year, with a 2-percent decline at dine-in restaurants offsetting a 1-percent increase at quick-service concepts.

Cowen Analyst Andrew Charles sees three headwinds the industry will face in 2017: Continued commodity deflation that will enable grocers to keep their prices low; various consumer spending pressures and an oversupply of restaurants.

Several factors could play a role in eating into consumers’ discretionary income next year, including gas prices that are increasing again along with health insurance cost increases. And don’t discount other factors, like more consumers buying cars and taking on the debt to pay for them.     As for restaurants, this sub-sector of retail real estate is getting hammered. Week after week news of major restaurant chains filing for bankruptcy or shuttering stores are common.

How much insight does one need when reading in the news, former Mall/Shopping Center Retail Stalwarts, like Macy’s, JC Penney, Sears, HH Gregg, Payless Shoes, Radio Shack, MC Sports, The Limited, Outback Steakhouse, Bonefish Grill and Carraba’s Restaurants closing underperforming locations, Logan’s Roadhouse and Cosi (Bankruptcy) and the list goes on.

Walking around even some the Better or High End malls, there is visual proof of many vacancies that hasn’t been seen since maybe forever.

So what is Really Going Here?

  • Where is the disconnect?
  • Is this all Amazon’s Fault?
  • Is it because there is no Universal Internet Sales Tax as many would lead you to believe?
  • Is the market in fact good or bad?

Or are we in the middle of a Paradigm Shift likes of which has not been seen since Ford started mass producing automobiles?

 Now to be fair, not all Retail Centers are experiencing issues. The best of the sector is what are known as “Neighborhood” or “Community Centers” or otherwise “Grocery Anchored Shopping Centers”.  If you click on the ICSC link you can navigate to their definitions of each type of Shopping Center. However, I think the type of “Center” mentioned above makes it pretty obvious what these Centers offer and where they would be located.

That said, just look at how many “Ghost malls” there are around the Country, look at how Mall operators are trying to figure out how to bring the “foot traffic” back to their Malls!

Adaptive re-uses are being implemented, and that is a good thing, but many are not traditional retail tenants.

I honestly believe the Mall owners and their lenders have missed every warning sign that has been posted for the past 3-5 years which foretold of the coming Paradigm Shift.

IoT has been the Game Changer and it is just beginning. One analysis has stated the United States has too much retail space per capita than anywhere else on the entire planet by a wide margin. The herd of shopping centers has to be culled. So what will be ICSC’s answer to this reality?

What is the incentive for the consumer (I no longer want to say shopper, as that implies someone who wishes to aimlessly stroll around and looking into stores of every stripe) to want to trek out and go “Shopping”. Is this a pleasurable experience, is it fun to go into stores and not find what you are looking for, it is annoying to be dealing with awful sales people, is it more efficient to drive to your local mall and spend money on gas, look for parking, or now pay for what was free parking to experience all the above? You all already know the answer. Which is why internet sales are hurting the “shopping center or Mall experience” and sales have been increasing every year. It’s easy on so many levels and more economical and little to NO hassle.

Can everything be bought online, or do people want to buy certain products without first seeing them in person, of course not, but the list is shrinking ever so rapidly as Internet Technology improves.

What this Newsletter is trying to point out, and perhaps I am being “Captain Obvious” is the Retail CRE industry has always had issues with transparency and telling it like it is.

So why with all the CRE data resources in the market, much of which can be accessed without too much cost/expense or trouble, is there this continuous disconnect?

 Doesn’t it always boil down to the local market forces and the good brokers/agents knowing full well what is going on in their backyards? One would think this would the case.

That said, this is why I advocate for the small business owner venturing out into any CRE marketplace, especially for the first time, because there is so much noise and misinformation.

I try to hand them the Prism of Reality.

 If you are about to look for a business space and need help and/or advice please contact me via email or call me per the phone # listed below.

It doesn’t cost anything to start a conversation!

It can cost you if you don’t.

301-762-6055 (o)

301-928-5818 (m)

Thank you for reading this newsletter.