By Jacob Bourne
REIS, a commercial real estate data and analytics company, released a report this year analyzing the relationship between the closings of major retailers and retail rental rates. The report, Impact of Large Chain Store Closures on Retail Rents, by REIS senior economist Barbara Byrne Denham and senior analyst Scott Rappaport, reveals data-based conclusions that were surprising to the authors given the numerous media reports chronicling the so-called “retail apocalypse.” They compiled data from the over 470 stores that have closed during the past two years, covering 77 primary and 36 tertiary markets all over the U.S. Although the closures represent 28.9 million square feet of space vacated by retail companies, one of the main findings was that it had little impact on rental rate growth in major markets.
Nationally, Sports Authority had the most closures totaling eight million square feet or 28-percent of all closures. Macy’s had the second largest amount at over six million followed by several other major retailers including Walmart, Kohl’s, Pathmark, Superfresh, A&P, Waldbaums, Haggen, Kmart, Sears, Golfsmith and JCPenny. In Seattle and Tacoma, the Sports Authority closures accounted for the greatest share. Walmart and Kohl’s were significant closures in terms of square footage for San Jose, as was JC Penny in Oakland. Of all U.S. cities, Philadelphia had the highest amount of retail closures in terms of square footage at just under two million square feet. Seattle had the eleventh highest with 686,099 square feet of closures. San Francisco wasn’t heavily impacted due to already lacking an abundance of major shopping districts relative to other cities.
While the authors didn’t deny that the rise of e-commerce has had a negative effect on brick and mortar retail, their research suggested that the impact has been more indirect. Many of these brands have been around for decades and haven’t necessarily kept up with changing consumer preferences, either in terms of marketing or product desirability. However, experience-oriented retail has increasingly attracted consumers. Since the economic recovery, restaurant growth has remained strong, and shopping malls are now featuring spas, trampoline parks, yoga studios and other services. Grocery stores were also found to be doing well overall.
While the amount of closures is substantial, the authors found that the impact on retail rent growth wasn’t proportionally high, and that this was especially true in larger markets, possibly because the economies were able to cushion the effects. The report examined 20 metros with the highest store closure rates and compared the numbers to the change in rent growth during the third and fourth quarters of 2015 and 2016. Of the markets that showed retail rent deceleration, all dropped by less than one percent. Seattle’s closures represent 2.5-percent of the city’s total retail inventory and had a rental growth deceleration of -0.6 percent. Tacoma, which had closures representing 2.6-percent of its retail inventory, had a slight rental acceleration by 0.2 percent.
The authors suggested, “The same factors that led to the store closures — oversupply, sluggish economic growth — impacted rent growth more than the actual closures themselves.”
Another point considered in the report that could potentially alleviate fears about widespread retail decline, is that a drop in oil prices over the same two-year time period resulted in negative gas sales and in turn hurt aggregate retail numbers. Also, restaurants that lease space in shopping centers have demonstrated growth in recent years. Employment growth was put forth as yet another promising indicator. Nationally the retail and restaurant sector grew by 0.3 percent between 2015 and 2016. In Tacoma, that sector showed bustling growth at 6.3 percent while Seattle experienced growth by 4.6 percent. In the Bay Area, the sector grew by 1.5 percent in San Francisco and 1.4 percent in San Jose.