EC Commercial Real Estate: The King Kong Of Category Killers

In mid-May, Morgan Stanley’s Richard Hill initiated coverage of the retail REIT sector, as in real estate investment trusts, companies that own and operate income producing commercial properties. He titled the piece, ‘Malls Aren’t Dying (Just Some of Them).’ Devising the dividing line involved simple and elegant analysis – if a property generated north of $400 per square foot in sales and was located in a major market, it was apt to survive. The ‘major’ aspect assured sufficient population density and a high enough median income to support minimum sales thresholds.

To take the sales argument to the extreme, Apple stores generate $5,000 per square foot. Throw in a few luxury anchors and a Microsoft store to keep things honest and you’ve got the mall of the future.

To place the ultra-high end into context, the average mall in America last year generated $165 per square foot, a 24 percent decline over the past decade. According to the latest data available from Cushman and Wakefield, this dramatic sales decline stems from a cratering of mall traffic: In 2010, there were 35 million visits to malls; by 2013, that number had halved to 17 million.

A landmark study by Green Street Advisors released earlier this year estimated that one-in-five anchor department stores would have to be shuttered to return many struggling chains to the same levels of productivity they enjoyed 10 years ago. Big department stores, such as J.C. Penney, Sears and Macy’s, occupy some two-thirds of anchor space.

Without a doubt, the hatchets are in full swing. In April, Sears announced it was closing 78 stores, including 68 Kmart stores. You might be saying, ‘No surprise on that one,’ — few of us even claim to know someone who has frequented these stores of late.

But the Macy’s announcement from a few weeks back, that was anything but fully priced into market expectations. In January 2014, the retailer said it would shutter 14 stores followed this January with the news another 15 were on the chopping block. Hence investors’ surprise when the company revealed it would close 100 more stores by early next year.

Anchor closings have a contagion effect; they weigh heavily on the smaller retailers that depend on the draw of the big boys.

“Retail bankruptcies and store closures have thus far represented the greatest risk for mall operators, but also a potential opportunity if they can be replaced by higher-quality tenants” wrote Hill in the wake of Macy’s news. “Further store closure announcements by department stores would be an incremental headwind for Mall REITS.”

If only it was as simple as a pure mall story. Retailers from the mammoth Walmart to the luxurious Ralph Lauren have also announced they will close stores this year to the tune of 154 and 50 locations, respectively. They too will be laying off thousands of employees nationwide.

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Robert Kientz 4 years ago Contributor's comment

Brilliant article. The only reasons to buy local (and not online) are a) niche or premium products not available online and b) convenience of I need it now. Walmart's neighborhood store concept should continue to thrive because Amazon cannot capture those who need milk for their kids for dinner tonight, not two days later. However with Amazon same-day delivery model being rolled out to a city near you, it won't stop them from trying. Eventually Amazon drones delivering goods direct to home will blot the skies of America.