When I was growing up, regional malls typically had the usual department stores — JC Penney, Sears and Macy’s. The special one was Nordstorm.
So I was surprised to learn the retailer is closing more stores in 2019 than it closed in the previous three years combined. With its profits falling, Nordstrom has closed three stores so far this year, and a fourth will close by August.
Overall vacancies at U.S. shopping centers have hit the highest level in eight years, according to recent data from the Financial Times. Reis reported the vacancy rate for regional malls was 9.3 percent during the first quarter 2019, unchanged from 9.3 percent in first quarter 2018, and up from 8.6 percent in the second quarter 2018. This is down slightly from a cycle peak of 9.4 percent during the third quarter 2011, and up from the cycle low of 7.8 percent in first quarter 2016.
And the return for institutional investors as measured by the NCREIF Property Index was 1.51 percent in the second quarter, down from 1.80 percent the previous quarter. Returns for all property types except retail were up slightly for the quarter. Returns for retail properties turned negative during the quarter by an amount that pulled down the entire index. The retail total return was –0.11 percent.
With vacancies not improving, landlords have gotten creative. Reis said, on the supply side, empty big-box stores have been converting to self-storage or been sold to developers for redevelopment; former shopping centers have been demolished; and there has been a general slowdown in building within the sector. With minimal construction in the pipeline, vacancy rates were able to stabilize a bit this quarter, though the retail sector will likely see more fluctuation ahead.
And landlords are increasing rents, both the national average asking rent and effective rent, which nets out landlord concessions, increased 0.4 percent in the quarter, reported Reis. Last quarter, asking rent grew by 0.4 percent, while effective rent grew by 0.5 percent. At $21.39 per square foot (asking) and $18.73 per square foot (effective), the average rents have both increased 1.7 percent from second quarter 2018.
As store closures continue to plague the bricks and mortar retail sector, many still fear the “retail apocalypse.” Coresight Research predicts the number of store closures could hit 12,000 by the end of the year. So far this year in the United States, retailers announced 7,567 store closures and 3,064 store openings. This compares with5,864 closures and 3,258 openings for the full year 2018.
In addition to malls, big-box retail centers and strip malls are also losing big anchor tenants. Even popular retailer Target has plans to close six stores this year (another shock for me). The chain closed 13 in February 2018, and 12 a year earlier.
The typical strip mall has a grocery store partnered with a pharmacy. And there have been a number of chain grocery store closures. Southeastern Grocers, a Southern U.S.-based supermarket, has closed 22 locations thus far this year. But grocery closures have yet to make waves compared with merchandise and clothing retailers.
Neighborhood pharmacies, or drug stores, are also closing. Earlier this month, Walgreens announced plans to close 200 U.S. stores. The announcement marks Walgreens’ largest round of store closures since 2015, when it also closed 200 stores. Its parent company, which bought 1,932 Rite Aid locations in 2018, has since closed 631 of those stores and plans to shutter another 119.
However, the closing stores represent less than 3 percent of Walgreens’ nearly 9,600 U.S. stores, said Phil Caruso, a Walgreens spokesman, in a statement to USA Today.
Caruso told USA Today: “As previously announced, we are undertaking a transformational cost management program to accelerate the ongoing transformation of our business, enable investments in key areas and to become a more efficient enterprise. As part of this effort, we plan to close approximately 200 stores in the United States.”
Fellow drug store CVS Health has plans to close 46 of its stores, saying the locations were “underperforming” as the drugstore chain continues to shift more of its retail presence toward healthcare services.
Overall, drugstores have so far been largely spared. Perhaps it will have a minuscule effect as a whole business plan for the firms, compared with clothing and department store retailers, as the neighborhood drug stores can be found in close proximity from sister branches. Plus it is easy to transfer prescriptions. Consumers need their medicine, so the location change is adjustable. But what about the vacant space previously owned by these anchor tenants? I live near two locations previously occupied by Orchard Supply Hardware. The company’s parent, home-improvement retail giant Lowe’s, closed all of its Orchard Supply Hardware stores in California and elsewhere last year. And the spaces near me are still empty.
For neighborhood and community shopping centers, the vacancy rate was 10.1 percent during the second quarter, down from 10.2 percent in the first quarter, and down from 10.2 percent in the second quarter 2018.
Should strip mall landlords be worried they may not be able to get an anchor tenant to fill the space?
