Retail Sector Weakens As Brick-and-Mortar Fundamentals Slip
The retail sector’s long and slow recovery, already well behind other commercial real estate sectors, is definitively sputtering to a halt, reported Ten-X, Irvine, Calif.
Overall investment in retail properties fell to $15.3 billion in the fourth quarter, down 19 percent year-over-year.
“In terms of brick-and-mortar stores and the real estate that supports it, the phrase ‘retail apocalypse’ is no hyperbole,” said Ten-X Chief Economist Peter Muoio. “Store footprints are continuing to shrink and we are seeing droves of traditional retail assets being repurposed or simply demolished.”
Muoio said headlines about store closings and bankruptcies of household names such as Toys ‘R Us and Radio Shack are just the most visible signs of a “massive reordering” taking place in the retail space. “While there are some markets that have managed to stay afloat and even thrive, the national retail picture is decidedly bleak,” he said.
The Ten-X U.S. Retail Market Outlook report cited Austin, Texas, Denver, Dallas, Houston and Salt Lake City as markets where investors might want to buy retail assets. “These areas, clustered in the Southwest, benefit from expanding populations, job and wage growth and increasing shopper counts, which partially offsets the powerful forces working against traditional retail nationwide and globally,” the report said.
On the other hand, Detroit, Kansas City, Chicago, northern New Jersey and Memphis, Tenn. are all markets retail investors might want to avoid or divest from. “These cities face adverse retailing conditions linked to poor local economic indicators, which may include lack of population growth, tepid job growth or simply an overabundance of new supply,” Ten-X said.
E-commerce has steadily chipped away at the retail sector’s fundamentals throughout this cycle; it now comprises 14.2 percent of non-auto retail sales–up from 5.5 percent just five years ago, Ten-X said. That percentage will likely continue to rise as consumers expand their online purchases to new types of products.
“In today’s market, there is limited upside for retail fundamentals and we expect further declines in both the number of actual stores and the size of their footprints,” Muoio said. “With fewer shoppers coming in the door, brick-and-mortar locations simply do not need as much in-store inventory as they used to. We’ve seen many traditional retailers partner with e-commerce companies in recent months, underscoring the importance for even brick-and-mortar stalwarts to have significant e-retail components.”
Ten-X modeled a possible general cyclical downturn scenario in 2019 or 2020 to analyze how each market would respond to “stress test” conditions, especially given the long duration of the current economic expansion. The forecast model reintroduces economic growth in 2021. It said during a 2019 or 2020 recession, retail vacancies could increase to the mid-10 percent range where they are likely to remain even when growth returns in 2021. “This is an elevated vacancy rate compared to previous cycles,” the report said.
