Many Retail Stores Closing! What Happens Next?

Commercial Real Estate Investing
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Many Retail Stores Closing! What Happens Next?

Derek Persuit
Investor · Fort Worth, TX · Member since 2017 · 43 posts · 7 votes

We're beginning to hear from all over that retail stores are closing and at a very high rate. Amazon and online shopping alike has made it convenient and easy for us to do a one stop shop for things from groceries to shoes then golf clubs, a book and furniture in less than 15 minutes without walking or driving anywhere. Due to this change in retail we have seen large stores begin to close.

First and most notably we saw Blockbuster video a few years ago. Now it has moved onto department and stores like JC Penny, Payless, RadioShack, and much more.

Because of this there is a great number of commercial property without occupants. There will be more casualties along the way as the move toward online sales continues.

My question to everyone is, 'what will happen to these properties?' Surely it will be hard for businesses coming into these properties to keep up with the rate of companies pulling out.

What are your thoughts on what happens to these properties and their owners?

If you had a commercial property like this or do, what would your strategy be from here on out?

Any and all thoughts on the subject are welcome and encouraged!!

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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y

Media fodder.

I look at over 1 THOUSAND properties a week for retail with my clients. I can say on my experience that these stories coming out is the media running with a snippet to perpetuate news.

Imparting fear into people sells stories for news agencies and gets eyeballs interested in reading the stories agencies are selling.

I have commented in other areas of this forum about retail in depth. When the Blockbusters went out retail developers LOVED it! Locations were very desirable in a lot of situations and easily re-purposed  for higher values. Example one property I saw became a bank and a dentist office side by side with national tenants.

Just like any asset class some tenants will not make it for projects. That is the SAME for multifamily or any other asset class. There will be properties that for one reason or another have constant issues with them and hard to keep performing.

Internet makes up about 10% of all retail sales currently. The younger generation is getting more of a (down to earth look) now and having earphones, shoes, other tech gear (phones) be the fashion statement. So a lot of clothes are bought online now for cheaper as it is an afterthought. These clothing places have been going out for awhile.

The mention of Kmart and larger spaces most of my clients do not buy as those do take awhile to find a tenant again for. I have seen some become self storage, some workout gyms, some garden centers, some antique stores etc.

My clients tend to buy retail centers with internet resistant tenants for mix like doctor, nail salon, hair salon, karate school, gym, restaurant,etc.

The sky isn't falling in retail. I get inquiries daily to buy these properties and spend millions of dollars down. Like anything you have to get with an expert who knows the markets and knows what to underwrite for in risk factors. That can make the difference between having a winning property years later or a loser where the buyer has lost their down payment equity by over paying for a property in a substandard location with a bad tenant mix. For retail you need to own good dirt unless you bought the building for next to nothing and you can cash flow with mom and pop retail tenants at warehouse per sq ft leasing rates built in.   

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  • Account Closed
    Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y
    Originally posted by @Joel Owens:

    ...Old malls from the 70's and 80's are simply outdated in most cases and need replacement...Online sales are not taking over retail. Taking over retail with online holds a lot of substance with retail clothing but not other sectors of retail that are internet resistant...

    So, we can start off with this article https://tinyurl.com/DyingMalls1 ; there is also mention that in the next decade from when that article was written, half of all regional malls in the country (some 1100) will be closed. Another article you can review to get some sense of the issue might be this: https://tinyurl.com/DyingMalls2 . Many experts in the sector seem to echo similar concerns.

    Sometimes you can be too attached, affiliated with or involved with something that you either knowingly (or unknowingly) form certain mental biases somewhere in the subconscious. You can easily just get blind to the facts based on your emotional involvement or heck, the fact/threat that your pay check may be at risk.

    The current retail industry and environment is materially different from that of the 70s and 80s. The risk factors retailers face today are significantly more than what they faced in the 70s. Online, is just one facet of the challenge. Profit margins in the industry have not grown larger over the decades but smaller.

    Think of new technologies, gadgets, software applications all causing all sorts of disruption in the space and all of which put a dent on in-store traffic count. Don't take it personal. Its a drastically different environment. There are a lot more today (and will be a lot more in the future) that will affect negatively brick and mortar traffic and sales.

    If you want to talk about the politics of unemployment, what goes into the count and the sheer hypocrisy of the numbers, simply start a thread. You can hold up a sign by the road with low unemployment numbers all you want but ask the business closing down stores why they are and they'll tell you why. Ask people why they are defaulting on mortgages they'll tell you why.

    The unemployment rate is different by region, profession and varies by class (yes race!)... underemployment is more of the norm for many workers (regardless of race) and what often is counted as “employment” for the employment numbers no mortgage lender would touch with a ten foot pole.

    Get the facts!

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    9y

    I don't buy into doom and gloom. Record year again this year! I don't have to worry about a pay check....... : )

    The facts are that smart developers are making millions to tens of millions of profit per deal in the retail space with developments. 

    New mall right up the street from me (450,000 sq ft) full with high rents from upscale tenants and a waiting list for any tenants that might go out. Mall gets 3 million visitors annually and has been open only 3 years. They are buying more land behind it for additional parking and buildings.

    I don't invest in the crap hole areas and neither do my clients. Marginal areas in downward economy the customer base tends to have less discretionary income and large debt from living above their means. 

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  • JD MartinBusiness Member
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    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    Random thoughts (related to this thread)

    • Graphs of retail closures are of little value without a corresponding graph of retail starts
    • Some/much of online purchasing depends upon a corresponding B&M "showroom" from which the shopper starts. If Best Buy can remain competitive in price with Amazon, for example, it is easier to buy the TV there and return it if you don't like it than the alternative.
    • No question online sales has supplanted some traditional retail sales, but that may simply be "creaming the crop" rather than reducing the overall pie. 
    • Superstore buildings will probably be slowly supplanted by smaller footprints with some type of virtual compatibility, similar to Walmart's "buy online pick up here". 

    Overall, I believe the reports of B&M demise are greatly exaggerated. In my area - anecdotal to be sure - there's virtually no empty retail except in a rough area or a building that's dilapidated and badly in need of renovations, and even those tend to become Salvation Armys or "Title Loan Here" operations. If anything, I think the availability of online purchasing is just culling the herd of the poor performers and improving everyone else. I mean, really - has anyone thought Sears or Radio Shack wouldn't be going out of business any day? Any time I went in one of those stores over the last 10-15 years they appeared on death's doorstep. No lie - last time I went to Sears to buy something that I saw in an advertisement, about 6 or 7 years ago, I was the only person on the second floor of the store - no sales people, no customers, nothing but me and merchandise. I could have stolen whatever I wanted. I ended up buying nothing because there was no one on the floor to check me out, which meant I would have had to walk the heavy item to the other end of the store, down the escalator, and then into one of the clothing areas. 

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  • Account Closed
    Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y
    Originally posted by @Joel Owens:
    ...New mall right up the street from me (450,000 sq ft) full with high rents from upscale tenants and a waiting list for any tenants that might go out. Mall gets 3 million visitors annually and has been open only 3 years....    

    Its macroeconomics not only about 'right up the street' where you live that does not represent conditions nationwide.

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  • Joel OwensBusiness Member
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    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    9y

    National median income average is 56,000. Typically like areas with good schools, low crime, low unemployment, 5 mile ring with 50,000 population or better, diversified employer base. High traffic counts on the road and growing. Strong economic development and planning department for the cities and the counties.

    There are many great areas around the country that meet this description or better. My clients like urban to strong suburban markets as do I.

    I know outlining rural to weak suburban areas are struggling nationwide especially in cold belt states as strong net migration is coming to warm belt states. Those have retail development on fringes that should have never been built to begin with. Those areas in an economic swing are last to recover and first to fail with a poor employment base.    

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  • Account Closed
    Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y
    Originally posted by @JD Martin:

    Random thoughts (related to this thread)

    • Graphs of retail closures are of little value without a corresponding graph of retail starts...

    oh you like the chart? It usually has a way of painting a clearer picture. If you have any fact suggesting investors in the retail space have nothing to worry about share it. I know I certainly would be nervous if the historical median of retail location closed is about 2,720 based on emperical data for the last 18 years and then suddenly -- it spikes to 8,640 in 2017. It just sounds like there is a difference between 8,640 and 2,720. I am trying really hard not to post a chart for that too..

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  • Account Closed
    Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y
    Originally posted by @Joel Owens:

    National median income average is 56,000....

    You kidding right? You do know there is a difference between household income and personal income right? National median personal income is about $30,000 as of 2015 based on data from the federal reserve. Another chart here: https://fred.stlouisfed.org/series/MEPAINUSA672N

    There often may be multiple persons in the household working to get to what is reported as household income; don't confuse household and personal income.

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    9y

    In LA they don't even wait for vacant status. They can tear down a perfectly good fully occupied retail center to build apts or condos or even tear down 12 acres of misc retail strips for a new mall . All properties are at all time lows with vacancies and inventory....industrial, commercial, retail, warehouse, residential, office, whatever you got. 

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  • JD MartinBusiness Member
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    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Account Closed:
    Originally posted by @JD Martin:

    Random thoughts (related to this thread)

    • Graphs of retail closures are of little value without a corresponding graph of retail starts...

    oh you like the chart? It usually has a way of painting a clearer picture. If you have any fact suggesting investors in the retail space have nothing to worry about share it. I know I certainly would be nervous if the historical median of retail location closed is about 2,720 based on emperical data for the last 18 years and then suddenly -- it spikes to 8,640 in 2017. It just sounds like there is a difference between 8,640 and 2,720. I am trying really hard not to post a chart for that too..

    You are right, it does sound like a lot - but it lacks context. Look at a chart of gold prices from 1981 to present, for example. Looks like it's off the charts, right? (I'm leaving out the hyper-price of 1980). Gold closed 1981 at about 400 bucks. Closed last year at about 1060. Huge jump? Nope - adjusted for inflation (context), you actually lost money if you bought in 1981 and held until now. 

    Same thing for store closings. Last year was actually fairly light on store closings, compared with the last (almost) 20 years:

    And, though 2017 "looks" bad (it's actually not completely happened, so it is projected), about 30% of those projections come from 2 chains (Radio Shack and Payless). I don't know about the Radio Shacks around you, but the ones I have seen generally have about 2 people working at any one time and occupy the last space in a decimated strip mall anyway. 

    This is not to say that store closings aren't important, just that without context it doesn't mean a whole lot. Look at this chart of store openings (projected):

    If I had to guess, I would say that those 3,000 stores more than absorbs the losses. And, in any case, all of it lacks context of geography, which is eminently important when you are talking brick & mortar establishments. When I look at lists of store closings, most of them are in places that have barely any population left anyway. Vermont, West Virginia, and Mississippi all lost population over the last decade - does that mean the US is losing population?  

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  • Joel OwensBusiness Member
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    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    9y

    You know it's funny that a lot of online only companies are now REALIZING they need to go brick and mortar! lol

    It's true I read an article yesterday that some companies going out of spaces were being replaced by online only companies wanting space. The difference being some of the brick and mortar only companies never refreshed their stores on the inside, never updated to omni channel marketing,etc. The brand became old and stale and not up with technology to keep giving a fresh and experiential product to consumers for repeat business. The CEO's would just bang out profit to make stock prices rise and get big bonuses instead of keep reinvesting in the business. Most CEO's do not last long so some take a short term (pay me the most now) view.   Re-imaging a physical location every so many years is critical to a space for a business to keep appearing new and fresh. You keep the old customer base but continue to drive new sales with new customers. 

    In good locations vacated spaces are being gobbled up fast. Some of the spaces are being reconfigured to today's consumer. Across age groups different segments tend to shop in a different way so you have to target the experience to your main customer. 

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  • Account Closed
    Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y
    Originally posted by @JD Martin

    The Gold thread is thread here. You also seem to be reiterating previous discussions. There happens to be 18 years of retail store closure data from which a mean and median got computed from; compared with 2017s announced closure the variance is material.  Questions about context is almost irrelevant here when you have 18 years of closure data to look through. 

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  • Mike Nelson
    Investor · Oak Park, IL · Member since 2014 · 307 posts · 150 votes
    9y

    in 2015 Warren Buffett took a 8% stake in REIT Seritage Growth Properties. Seritage was spun-off from Sears, and holds many store buildings Sears leases cheaply. If Sears closes a store or goes out of business, stores can be developed and leased at a multiple several times higher. One question is if a big enough percentage of units can be redeveloped fast enough, as well as some legal issues in the case of a bankruptcy. There are many well-located properties, but not all are likely to be desireable. It is interesting that Buffett has a position, and I wonder what numbers he has run.

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  • Justin Schaefer
    Real Estate Investor · Mukwonago, WI · Member since 2017 · 76 posts · 16 votes
    9y

    Most retail seems to still be doing quite well, but from many years of experience in the retail world myself, I can say that retail stores must constantly reinvent themselves, and in many cases not only keep up with the times, but reinvent (or at least participate in the reinvention) of the times.  

    The being said, the real estate that failed retail outlets once occupied, also will almost always reinvent itself.  There are always reasons for these "failures," often times of which most people are not aware of.  My cousin is a big commercial investor in the Twin Cities, and has expanded out across the country.  I recently asked him about his thoughts on places like the 1,000,000 square foot Mills Mall in PA that recently sold for $1 per square foot.  His response was that those places usually reinvent themselves.  What was yesterdays shopping mall could easily be tomorrow's university site, or office building etc.  I personally know of a mall that was converted into a community college a couple of hours north of me, and it was just blossomed, but also remember what a failure it was of a mall in the 15 or so years prior to it being sold and "reinvented."

    As for me, I am going to take respectful observation of those failures, and then focus on what I am doing right, and keep on doing it more and more right.

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