Green Street Advisors: E-Commerce Threatens Some More Than Others
Growing e-commerce is slowing the retail sector–yesterday Sears Holdings said it has ‘substantial doubt’ that it can survive–but e-commerce affects different retail centers differently, reported Green Street Advisors, Newport Beach, Calif.
High-quality malls have seen much more asset value appreciation in recent years than Class B and C malls, Green Street said. Values for high-productivity malls have more than doubled since the recession even as e-commerce spending grew dramatically.
“Better quality malls are adapting and introducing ‘Internet-resistant’ concepts such as restaurants, entertainment and services,” said Green Street Advisors Managing Director DJ Busch. “Mall landlords have been working diligently to diversify merchandise mixes and reduce exposure to the apparel category.”
Lower productivity malls are still “clawing back” to pre-recession peak levels, Busch said. E-commerce headwinds, a secular department-store decline and more limited financing means that lower productivity centers may struggle to compete in the long term. “There are over 300 malls in the U.S. that are considered ‘C’ quality, which are the most at risk to close over the next several years,” he said. “Fortunately, these malls only account for roughly 5 percent of mall value in the U.S. and most won’t be missed.”
Though not immune to it, strip centers are less threatened by e-commerce growth than malls, Green Street said, noting that strip center tenant demand still outpaces historically low new supply and operating fundamentals will likely remain positive for some time. The biggest risk to the current forecast for strip centers remains an unforeseen increase in tenant bankruptcies rather than e-commerce, the report said.
“Strip centers–particularly grocery-anchored centers–are more immune [to e-commerce threats] than other retail property types,” Busch said. “Not surprisingly, e-commerce will impact low-to-average quality centers most, however higher quality centers should be fine.”
Busch called retail a “Darwinian” business that is constantly evolving. “Tenant bankruptcies are not unusual and failing tenants are often replaced by newer, vibrant retail concepts,” he said. “The question this cycle is whether there are enough new concepts.” He noted that big-box tenants “have seen better days” and said the demand pool to backfill these larger spaces seems pretty shallow.
“Several noteworthy strip center anchors announced material store closures–space that will need to be re-leased in 2017,” Busch said. “With mall landlords also eyeing strip center tenants to backfill vacant boxes, will there be enough to go around?”