The retail sector is struggling as e-commerce continues its breakneck growth and consumer trends shift. Brick-and-mortar retailers are closing shops and going bankrupt at record levels, which leaves many landlords left managing empty space and losing money.
But instead of sitting idle, retail landlords are acting creatively to overcome market weakness. From finding ways to monetize unused space to rethinking their tenant mix, landlords are taking steps to adapt and profit in today’s uncertain environment.
Retailers are struggling
Retail bankruptcy levels are higher today than they were during the height of the Great Recession. That trend is not expected to slow soon, and Kleiner Perkins Caulfield & Byers general partner Mary Meeker’s 2017 Internet Trends report projected retailers to close more stores this year than they have at any point in the last 20 years.
Some of the nation’s largest retailers are struggling more than most, and Sears plans to close up to 72 more stores this year, bringing Sears’ total planned closures in 2017 to 246. The retailer has nearly cut its store count in half since 2012 after years of falling sales. From Gymboree to Payless Shoe Source, many well known retailers have fallen to Amazon in the last year alone, and most developers agree U.S. markets are completely oversupplied with retail space.
Retailers are not blind to that reality, and more companies are pressuring landlords into accepting shorter lease terms to make it easier to quickly close stores, according to Bloomberg. Instead of typical five- or 10-year leases, retailers are demanding one- and two-year leases so they can better respond to shifting markets. Cushman & Wakefield vice president of Americas retail research Garrick Brown told Bloomberg between 9,000 and 10,000 U.S. stores will close this year, and he said around 13,000 will shutter next year. While short leases make it easier for retailers to stay nimble in uncertain markets, they also make it more difficult for landlords to keep vacancy rates down.
Landlords are adapting
Empty space is every landlord’s worst nightmare, and retail landlords are having to think creatively to keep occupancies up. Many landlords are rethinking their tenant mix, and when a retailer closes down, landlords are increasingly looking to rent to unconventional tenants. Starwood Capital Group did just that when it leased a former Lord & Taylor anchor space in a Dearborn, Michigan mall to Ford Motor Co., the Wall Street Journal reported. Instead of a short-term lease, Ford signed a 10-year lease and moved its engineering and purchasing staff into the space. Ford rents 240,000 square feet in the mall and is now its largest tenant.
In addition to companies seeking office space, retail landlords are targeting restaurants, for-profit universities, grocers, entertainment venues and even churches as they try to fill space with anything but retailers. The Wall Street Journal said some owners are converting malls into open-air properties with apartments, theaters and grocery stores, and others are simply demolishing struggling malls and replacing them with industrial space.
Big-box stores and mall operators are also finding ways to repurpose and monetize underutilized space, especially parking lots. Macy’s head of real estate Doug Sessler told the New York Post a typical Macy’s store owns 20 acres of land, and recently the retailer announced plans to repurpose parking lots at 50 locations. Macy’s wants to either sell some of its empty lots or rent them to businesses that will help drive traffic to their stores, like restaurants. Macy’s is not alone — both Target and Lowe’s have listed excess lots outside some of their stores in a similar attempt to monetize underutilized space.
The future of retail and its landlords
While predicting how much e-commerce will impact brick-and-mortar retailers is always an uncertain business, most experts agree future markets will have less retail space. Mall landlords are already favoring non-retail tenants, and CoStar director of retail research Suzanne Mulvee said at Bisnow’s National Retail Series event that there’s about a billion square feet of retail space that needs to disappear before markets can be healthy.
That’s partially due to e-commerce, which is expected to grow more than 15% this year according to Mary Meeker’s report, but it’s also due to shifting consumer trends. Millennials are less inclined to spend money on stuff than previous generations, instead they prefer to spend money on experiences, and that trend will become even more important as America’s largest generation continues to age.
Malls of the future will likely have fewer stores and more diverse offerings. They may transform into a mix of retail, office, entertainment and residential space, as some are already doing. And while it’s unlikely brick-and-mortar retailers will become totally extinct, it’s almost certain future markets will accommodate less of them. But that doesn’t mean retail landlords are doomed, and from rethinking their tenant mix to creatively repurposing space, many are already evolving alongside the market.