Big-Name Retail Closures Need Not Threaten Rents

Several major retailers have announced large store closures in recent months. But there is little evidence that the closings had a direct effect on retail rents, reported Reis, New York.

The Wall Street Journal reported that 14 major retail chains including Payless Inc., RadioShack Corp. and Limited Stores Co. have filed for bankruptcy already this year compared to 18 that did so in 2016.

In a special report, Impact of Large Chain Store Closures on Retail Rents, Reis Senior Economist Barbara Byrne Denham and Senior Analyst Scott Rappaport examined 470 store closures totaling 28.9 million square feet. The closings included Walmart, Kohls, Sports Authority and Kmart and more recently Sears, Macy’s and JC Penney.

“In short, the closures have impacted these metros but there is no compelling conclusion,” the authors said. “That is, those with more store closures in general have seen a sharper deceleration in rent growth, but only a few have seen rent declines.” 

Moreover, the report noted that the correlation is not as high could be expected: some metros with significant store closures saw no effect on rents while others with low store closings saw significant rent declines.

Reis noted that five smaller metros saw rent declines in the fourth quarter and all five had significant store closures. “Thus, there may be a stronger impact on rent growth from store closures when the market is relatively small,” the report said. It noted a “significant” correlation between the percentage of inventory of closed stores and rent rate deceleration in tertiary markets.

The report said store closings had a “marginal” effect on rent growth in some metros. “Although, one could equally argue that the retail climate was already weak, that the closing of stores was more a national decision or that rent declines were driven by an oversupply of retail stores,” Byrne Denham and Rappaport said. “Economists call this an ‘endogeneity’ problem; that is, the variables studied are connected along with other variables, making it difficult to determine how the causality works.”

A number of economic factors led to many store closings including consumer tastes for brands, growing “experiential” spending by consumers on restaurants, spas and fitness rather than in retail stores, poor planning by retail businesses and the rise of e-commerce, Reis said: “This analysis suggests that all of these factors are affecting bricks-and-mortar retail businesses, but the closing of the larger stores is not necessarily hurting retail rent growth as directly as many would assume.”