Retailers Prepare for Wave of Store Closings That Will Surpass 2017
by Josh Anderson
NEW YORK, NY — A new wave of store closings in 2018 is expected to eclipse the sweep of closings that shook the retail industry last year. Unfortunately, 2017 became a record year for store closings and retail bankruptcies. Retailers including Macy’s, Sears, and J.C. Penney closed an estimated 9,000 stores and 50 chains filed for bankruptcy – exceeding levels seen during the last recession by far.
CEO and Founder of the advisory firm SierraConstellation Partners, Larry Perkins, said in a conversation with Business Insider, “Landlords are panicking. The last year was pretty apocalyptic from a retail standpoint, and the macro issues haven’t changed. There will continue to be a high degree of bankruptcies and store closures.”
The U.S. continues to see a glut of retail space in the United State and fallout continues to land. Nearly two dozen high-profile chains including Walgreens, Gap, and Gymboree already announced plans to close more than 3,600 stores this year, and more notices on closures and bankruptcies are still expected. Closing stores and filing for bankruptcy can be costly, so many retailers announce store closings and bankruptcies at the beginning of the year when they are still flush with cash following the holiday season. According to S&P Global Market Intelligence, Sears, Bon-Ton Stores, Bebe Stores, Destination Maternity Corp., and Stein Mart are among companies most likely to file for bankruptcy within the year.
Not surprisingly, retail closures are not unique to shopping malls. Fung Global found in early 2018 that there were 6,885 announced store closures in 2017 , compared to only 3,443 announced store openings in the same time period. Even New York City has seen record closures — Cushman and Wakefield found that asking rents for retail units on Third Avenue fell 4% at the beginning of 2017 compared to 2016, while the availability rate in New York City was 14.4%, up from with 10% a year before. The most pronounced area in New York might be on Madison Avenue, whose vacancy rate is clocked in at almost 23%. Madison’s asking rent price fell 12% in response.
In New Jersey, this fall of retail has been on clear display thanks to the bankruptcy of Toys R Us, who announced in mid-March that it would sell or liquidate all of its stores. Though some buyers have reportedly expressed interest in saving the chain (including an angelic CrowdFunding effort as of today), the toy-giant has struggled to find realistic bids. Toys R Us is based in Wayne and has 11 locations across the Garden State.
However, shopping malls are perhaps the most emotionally jarring trends, with many suburban and ex-urban areas seeing their only “outlet” for consumerism close up shop, often taking venues for community events with it. When combined with last year’s record-high store closings, a higher rate of closings in 2018 would throw hundreds of low-performing shopping malls to the brink of death. Commercial real estate firm CoStar has estimated that roughly 310 of the nation’s 1,300 shopping malls, (approximately a quarter of malls in the US) are at high risk of losing an anchor tenant. Anchor tenants include huge retailers like Macy’s and J.C. Penney that occupy large, multistory buildings at mall entrance and the loss of one of these retailers can trigger a massive downward spiral for mall owners.
Not only do malls lose income and shopper traffic from a store’s closure, but these closing often trigger clauses that allow the remaining mall tenants to exercise their rights to terminate their leases or renegotiate the terms, typically with a period of lower rents, until another retailer moves into the vacant anchor space. This is great news for retailers growing physical assets by negotiating lower rent and more favorable lease terms – while it devastates retail landlords who may sue the companies for breaking leasing agreements and reducing foot traffic.