The 1978 film Dawn of the Dead, and the 2004 remake of the same name, both set their action inside a shopping mall, with plucky heroes setting up camp inside retail centers as zombies gather outside.
The scenario might sound familiar to investors in traditional retail properties in 2017.
One sign of increased distress: More retailers filed for bankruptcy in first quarter 2017 than in all of 2016. It gets even more grisly. Credit Suisse predicted in a new research report than as many as 25 percent of U.S. malls will close by 2022.
Many traditional retailers are struggling from a combination of high leverage levels and the rising popularity of e-commerce, as well as changing consumer tastes and a focus on value-oriented retail.
Cushman & Wakefield reports Amazon is poised to overtake Macy’s as the largest apparel retailer in the United States. (Recent retail bankruptcies have been concentrated in the apparel sector.)
Retail and food sales slowed in March, according to the U.S. Census Bureau, falling 0.2 percent from the previous month to $470.8 billion. Still, retail sales in the first quarter were up 5.4 percent, compared with sales totals in first quarter 2016. In addition, consumer confidence dipped in April, according to the Consumer Confidence Survey.
But while the retail sector may be threatened by structural changes, recent performance has held up. CBRE’s first quarter U.S. retail report notes rents have reached levels not seen since 2008. Net asking retail rents reached an average $16.97 per square foot nationally in the first quarter, up 6 percent year-over-year, with the strongest growth in the lifestyle and mall segment, up 28 percent since first quarter 2016.
The report notes, “Steady year-over-year growth in real GDP, payrolls and real disposable personal income is expected to provide solid footing for economic growth in 2017. Though these growth indicators showed a slight deceleration [in the first quarter], their continued gains reflect a healthy economic environment relative to the past two years.”
In Dawn of the Dead, the mall of refuge is eventually overrun by zombie hordes, and only those who can successfully exit the property survive. In much the same way, retail property investors are experimenting with new formats that will help them survive a potential collapse of the mall sector. The new focus is on experiential retail — restaurants, movie theaters and lifestyle centers designed to attract foot traffic — as well as healthcare
-focused tenants and the top properties in a given market.
As Cushman & Wakefield’s first-quarter shopping center report notes, “We are likely to be in a period of rising vacancy levels and diminishing tenant demand through the remainder of this economic cycle. Going forward, the winners will be quality concepts and quality projects as the chasm in performance between class A retail real estate and other retail product widens.”
Loretta Clodfelter (firstname.lastname@example.org) is editor of Institutional Real Estate Americas.