America’s ‘Retail Apocalypse’ Is Really Just Beginning

26 Replies

Article from bloomberg. 

America’s ‘Retail Apocalypse’ Is Really Just Beginning

Where do you see an opportunity in this? and why?

Amazon building more fulfillment centers in the midwest is going to speed up the demise of some retailers. 

With more vacancies in store fronts and fewer retail jobs, where will the growth be? Warehouses and fulfillment centers? 

Being in this industry in my day job, I see the larger "high end" retailers taking the biggest hit. The Nordstrams, Dillards, Penney's etc. We've already seen Sears go the way of the dinosaur, and those retailers will continue to take hits. The discount chains like TJX stores (TJ MAXX, MARSHALL's etc) are growing like gangbusters. Brick and mortar will never go away, but its going to change a lot. 

The drab days of pile it high, stack it deep are over; consumers want more. And it can't just be about value... as that on its own will surely be a loser when AMZN can wipe that clean with its efficiency (e.g. TJMaxx). So those that are creating experiences within its brick and mortar will continue to grow. In my view, it's infill convenience locations, food service, health clubs, medical services, as well as those dynamic retailers, like REI, Bass Pro, Whole Foods, Anthropology... (they know how to merchandise and story tell to consumers in awesome ways). ...so brick and mortar ain't dead, just evolving.

@Christopher Blanco

It sounds like the malls are going to be affected the most first based on what you mentioned. Sears, Penney etc. 

What other areas or industries do you see that are changing and growing besides the discount chains? 

@Chris T.   In retail, the small box (Think Cell phones, vitamin store etc) and c-store (convenience store) sectors are growing pretty steadily as well. We have also seen an uptick in distribution centers, and not just Amazon. 

@Chris T. Brick and mortar will have its place but it is moving towards retailers that can provide an "experience". With the advent of the Internet, consumers demand more and they demand an experience that can make them feel a part of a bigger story/narrative. This means that retailers that operate in a deep, well-defined niche will be the clear winners. 

As @Fred Shank pointed, dynamic retailers like REI, Bass Pro, Whole Food, Anthropologie are thriving. The days of Sears and Kmarts are over or soon to be over.

Plus, look around you, the average consumer is more informed and demands a better quality product/story. Even within your own social circle you would have observed these dynamics. 

Those of us in the business have known this for the last 6 years. Where do you think reporters get snippets of info from? lol

Everyone can keep thinking retail has a problem meanwhile investors are making millions to tens of millions off of the asset class.

Just like any asset class you have to buy right going in and do your due diligence.   

Problem is not retail, it's the debt that will go bad and the impact on local employment.

@Chris T. Swapping a job in Old Navy in a mall for Amazon Fulfillment Centers, is really all about one demographic, college and teen kids that can drive.

Here in Jacksonville we have two Amazon centers and they have plans for two more. The average wage is $10 per hour and work people for 10 hours with few breaks. It’s tough demanding work. It’s about the same pay as working in the mall, but more demanding for sure.

The malls will survive by offering a mix of product and service offerings inside. Having a town of services, with maybe residential built next to it or attached will be the way they survive. If you could eat and get everything you need there, why would you leave?

Yes the old rack, pack and stack are going away, but a new model will blossom. We’re already seeing it here in Jacksonville with Town Center and the apartments/condos connected to the development. Next up is AC shuttle service with billboard ads and drone ads.

No doubt retail is taking a hit. However, concentrating on commercial such as medical offices, as well as other commercial that amazon won't touch there will always be demand. Locally, I see the older centers that are not attractive as having the most issues. Some are going through renovation to make them look more modern and appealing. 

I've had similar conversations over the past year or so - I'm imagining the emergence of more hybrid storefronts, there's a segment that won't buy unless they see/feel/try on prior to purchase. Selections will be made (size/color/style/options) using in store samples, payment made, then shipped to doorstep within a matter of days (if not hours). Lowers retail SF requirement drastically, among other savings.

Distribution centers located nearest the highest percentage of population will continue to grow - as well as more automation internally - with less $10 hr wages.

Just my $.02 - others with thoughts on this?

@Lucius Carroll

That was my thought as well. As more warehouses and industrial parks are build close to those centers, more people move to those areas, therefore driving demand for residential housing. (where I focus in now)
 I see that in the southwest part of Chicago especially in Will county.

@John Thedford

Yes. Market forces dictates that the older retail centers are either renovated or tear down, however those rents still have to be competitive to lure in tenants? otherwise, it's a downward spiral with vacancies.

@Jack Bobeck

Yes, I have seen malls being recreated especially into affordable housing as well. That makes good sense, rather than having a vacant mall or tearing it down

7 Dead Shopping Malls That Found Surprising Second Lives

@Sam Josh

Exactly. Local employment goes down, vacancies go up, tax revenue goes down, and towns find other ways to raise taxes to generate loss revenue. So that's why I am curious which retail stores are most likely to be affected. Therefore avoiding those towns. 

@Joel Owens

Absolutely. This is why I am here to learn from seasoned investors such as yourself. 

Just like every other day someone posts "The crash / recession / "insert worst case scenario here" is coming" 

Can you share WHERE you see opportunities? 

A friend of mine that I have done business with purchased a 100% vacant strip about 2 years ago. They completely renovated and put their retail business in the center as anchor. Last time I talked they were having great results in leasing up the rest of the center. Of course, being a cash investor can make those projects a lot easier without debt service. 

Chris most of the growth is in the warm belt states. In those states you have outward strong growth in urban core and suburban areas.

I would stay away from weak suburban or rural type areas regardless of cap rate or state. Those areas tend to be first to decline in a down turn and last to recover in an upturn.

With baby boomers and retirees about 75% that are moving away from cold belt states are going to GA,FL, and TX. AZ,NC,SC,TN etc. are also experiencing good growth.

In the cold rust belt states you have to be very careful with investing. Still some areas of growth but more isolated pockets. Many of the suburban areas there are having limited growth and instead contraction. In Illinois there are a lot of areas with very high property taxes which puts pressure on retailers whether STNL or MTNL as they are generally paying on the landlords behalf.

Example the 5 million retail center in GA might have 35,000 in property taxes annually, TX about 55,000 as it is a no income tax state, and parts of Illinois I have seen upwards of 100,000! So that can put real pressure on tenants to pay total cam above base rent to survive especially if not a national tenant and more of a single unit local or multiple unit local operator. In cold belt areas even if you have an old building to tear down or re-purpose the demand might not be there versus the rent you could get and tenant type.

In GA right now TX is about the only state outpacing us for growth. The affordability index here versus the jobs and businesses is incredible. For our state in about the next 10 to 15 years we are set to grow by about 5 million more people. 

Most of what is being discussed here is apparel store type tenants. Not many want these tenants today. We look for internet resistant tenants ( food,karate,barber,gym,doctor,nail salon, hair salon,etc.) These are staple tenant where consumers are not going online and instead spending dollars at the location.

Malls and apparel type tenants overall are a small slice of retail pie. If location and area is good there are plenty of other re-adaptive uses.

I stay away from small town with just a few employers where a couple of negative events happen and now the area is on a downward spiral. 

As stated above there will be changes in how housing will be mixed into urban type living. They call it SURBAN areas. A lot of cities started the trend of having all the shops/retail/restaurants etc etc all within walking distance of where you live. Like downtown San Diego, Irvine Spectrum center and many more. They are taking large lots in the suburb areas and starting to build more like this. We have one starting here in menifee shortly. READ THE BOOK “BIG SHIFTS AHEAD” BY JOHN BURNS. I️ read it in a day, great book and goes into this subject and has tons of data on where this country has been and going.

This to me is the potential time bomb that could trigger the next financial crisis.

Big retail goes bust, that triggers bad loans for banks and banks (esp regional banks) start to show instability and then there is unemployment for the retail workers.

There are then cascading impacts on other parties like suppliers and vendors who used to service these locations.

BUT the debt is what worries me most. That debt burden is huge!

The retail meltdown itself will likely affect smaller cities and towns more that have retail as a big source of employment vis a via bigger cities like say the sF Bay Area where the economy is a lot bigger than retail. That said a financial crisis is exactly that. It will cause a crisis and a cascading one.

Not saying that will happen but Bloomberg is pointing this being one potential source and a big one that we as savy investors need to watch for.

One thing I rarely see mentioned is the fact that a lot of these retailers overbuilt in the suburban areas.

I strongly believe that retail will survive, but we are going to go back to an older model. Basically there will be a lot less stores and people will have to drive a lot farther to do traditional shopping. 

Think back to the old days. Everyone from all over the area used to have to go into the city to shop. 

It's area dependent. From my subdivision I have everything I need in a 3 mile suburban radius ( 5 minutes).

Distance is not always the end all to be all. People tend to shop within a 30 minute drive max time frame. In some areas you can go far in 10 minutes and in others going 1 mile can take an hour.    

@Chris T. See link below for another perspective. It's an investor presentation from one of the mall operators. If you look starting on page 5 they talk about how they are turning the Sears, Penneys and Macys into other tenants. Unfortunately, the transition is likely to be expensive and drag out for a long time. But some of the ones they have come up with are really cool.

http://invest.cblproperties.com/file/103092/Index?...

Basically their story is box department stores and apparel is on the way out and they are leasing to new types of tenants.

I also think slide 14 does a good job of summarizing the transformation. Big Box department stores and apparel retailing are on the way out, restaurants, health & wellness, entertainment, value/boutique and mixed use are on their way in.

There will always be Walmartians. A huge segment of the population is poorly educated with no credit. Also many middle class families plan outings for their children just to get out of the house. A segment of our society will always shop in person. 

Where the retail stores will suffer is the higher paid and better educated consumer with better credit. But even those folks will want to go to the mall and look around. Like my grandmother used to say, "Boy, it is time to get outside and let the stink blow off.

Some entrepreneur will come up with a use for those buildings. Indoor storage, paint ball parks and whatever the next arcade fade will be.

As has been said, "The automobile is crushing the buggy and whip industry, what will we do?"

Movie theaters survived Block Buster. Blockbuster could not survive Netflicks. There will always be change. The key is to lead instead of follow.

Mark my words. Some future millionaire will figure it out first, and the herd will follow.

Jeff Kehl I have sold some off market properties that CBL has had an ownership interest in before.

The company was good in their dealings. My main contact was with one of their junior partners.

There are still some brand new malls going up.

The one down by my house the Atlanta Outlet Shoppes is 450,000 sq ft built about 4 years ago open air. Constantly full with tenants and gets about 2.5 million visitors a year annually.

The old mall models are what I do not like. You walk in and clothing store after clothing store. The unique store items you would pay a premium for in the past  to only find at the mall have gone online and you can buy online and get shipped for cheaper because  overhead costs are lower.

I also see plenty of dead space in older malls and the existing tenants are getting crushed with rising cam taking care of an older building with increasing annual costs to maintain it. Management I have seen load kiosks in the aisles everywhere and they hound you to buy their crap. This is NOT CBL I am just talking in generalities with an older mall 40 minutes from my house.

The newer malls are open concept and they do not have the middle kiosks everywhere.  

If mall is in great area the demand will be for the land.

Originally posted by @George Skidis :

There will always be Walmartians. A huge segment of the population is poorly educated with no credit. Also many middle class families plan outings for their children just to get out of the house. A segment of our society will always shop in person. 

Where the retail stores will suffer is the higher paid and better educated consumer with better credit. But even those folks will want to go to the mall and look around. Like my grandmother used to say, "Boy, it is time to get outside and let the stink blow off.

Some entrepreneur will come up with a use for those buildings. Indoor storage, paint ball parks and whatever the next arcade fade will be.

As has been said, "The automobile is crushing the buggy and whip industry, what will we do?"

Movie theaters survived Block Buster. Blockbuster could not survive Netflicks. There will always be change. The key is to lead instead of follow.

Mark my words. Some future millionaire will figure it out first, and the herd will follow.

 Hopefully that future millionaire is here, among us on the BP forums, who can share a little insight for the rest of us! 

Thank you @Joel Owens for sharing a lot of his experiences as well. 

Here's another question. Do jobs come first ? or population come first? (chicken or an egg question)

Companies don't want to invest if there're no workers, and people don't want to move unless there are jobs, housing and retail. 

Which is a leading indicator?

From what I️ have read and what I’m seeing is they will be built all together as one in these SURBAN called areas. That’s what they are doing in my booming suburban area. Commercial/housing all in one huge lot area. Convenience for all who live there to have everything at there fingertips. The mix of urban/suburban. Like I️ said before read the book Big Shifts Ahead by John Burns, lead economist for Fannie Mae. Goes over a lot of housing stuff in this book with data to show in graphs/charts.

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