The retail market is changing. Consumers are more informed and more discerning, there are more ways to purchase products than ever before, a wealth of disruptive new retailers have entered the market, and the operational demands put on retailers continue to grow.
Some retailers are thriving in this new reality, while others are failing to keep up. For landlords, these trends are important to watch as the profitability of shopping centers and major malls depends on the success of brick-and-mortar retail.
To see how retail vacancies create opportunities, it’s important to look first at how retailers are struggling.
How Retail Vacancies are Created – Some Major Retailers Struggle with Change
Amidst all of these challenges, a number of well-known retailers, who once dominated the industry, have struggled.
Several big box retailers who used to play the role of anchor store in both shopping centers and major malls are shuttering stores and condensing their physical footprint. Recently, bankruptcy filings by Sears, Toys R Us, HHgregg, and several other companies have captured headlines. The second bankruptcy filing of Gymboree, in particular, is helpful in demonstrating the difficulty some major brands face in today’s retail environment.
Gymboree has had a difficult path through bankruptcy. Originally filing for Chapter 11 in June 2017, they exited in September 2017 after closing 300 stores and getting rid of $900 million in debt. Now, even after shedding all of this debt, they’re back in bankruptcy with plans to sell the online IP of Gymboree, sell the Janie and Jack brand, and close Crazy 8 and Gymboree stores.
In the end, it was their inability to separate the Crazy 8 and Gymboree brands that led to their precipitous decline in market share, according to Susan Anderson, managing director and senior equity research analyst at B. Riley Financial, in a recent interview with Retail Dive. The cheaper brand hurt the Gymboree brand irreparably in the minds of consumers. They couldn’t be won back when there were so many readily available alternatives.
The story of Gymboree is representative of the challenges many retailers face. Shedding debt is difficult and has long-term consequences. Many retailers choose to liquidate all their assets instead of restructuring their business. And in today’s retail industry, discerning consumers are hesitant to buy from a company with low brand perception when so many other brands are thriving – just one of the several challenges in the modern retail space.
Good News for Landlords of Shopping Centers and Major Malls
While well-known retailers shutting down store locations isn’t directly good news for landlords, there are plenty of reasons to be optimistic. Losing underperforming stores and brands can be a good thing, and chances are this space may not be difficult to fill.
Savvy competitors often seek to take away market share from bankrupt retailers, allowing them to expand their physical presence. This strategy is common in the retail industry, as companies who are battling bankruptcy cannot put their focus on running daily operations, let alone finding innovative ways to grow sales volumes and streamline operations, offering the perfect opportunity for savvier competitors.
The Children’s Place and Carter’s, two of Gymboree’s biggest competitors, have steadily taken market share away from Gymboree since 2017 and will continue to do so. The Children’s Place was particularly blunt in their strategy to take advantage of Gymboree’s decline. According to a Seeking Alpha transcript, the CEO of The Children’s Place Jane Elfers explicitly told analysts in an earnings call they were “the best positioned retailer to gain market share from Gymboree.”
Store closings from bankrupt retailers very well may open the door for their competitors to occupy more space as they gain market share and expand.
Additionally, landlords have leverage when it comes to store closings. For example, Elon Musk recently made a major announcement with plans to shut down almost all of Tesla’s retail stores in an effort to lower the price of their Model 3 electric vehicles. Now, landlords are pushing back, as Tesla owes $1.2 billion in lease obligations between now and 2023 and may have to uphold much of these obligations.
Similarly, Starbucks announced in 2018 that it would be closing all 379 of its Teavana stores due to poor performance, but Simon Property Group Inc., the nation’s largest mall operator, filed a lawsuit claiming this violated their leases in Simon malls. A judge had originally ordered Starbucks to keep 77 Teavana stores open, but the two companies later reached a settlement.
Landlords have leverage when it comes to the sudden closure of retail locations, as the two examples above have shown. But even beyond this, competitors are always looking to steal market share and vacant retail space is beginning to be used in other more creative ways too.
Opportunities Arise from Vacant Retail Space
Current levels of new retail construction are low. In terms of filling vacant retail space, landlords can see this as an encouraging sign, as their vacant space has more value given the low volume of new retail space emerging.
With large, empty spaces in shopping centers or major malls, landlords have an opportunity to transform their properties into vibrant community centers. Many developers are repurposing vacant anchor stores and retail space with theatres, restaurants, and entertainment-focused stores.
Main Event Entertainment and Dave & Busters, who both offer arcade games and karaoke, are becoming popular entertainment-focused anchors in today’s shopping centers and major malls. Renting retail space as office space is also an increasingly popular trend, as employees often enjoy the convenience of being near their favorite stores and, in turn, prove to be loyal customers of a given retail location. Everything from indoor go-kart tracks, trampoline parks, and comedy clubs are entering the retail space.
Grocery-anchored shopping centers have risen in popularity over the past few years. Gary A. Glick, a partner at Cox, Castle & Nicholson, in an interview in GlobeSt.com, said that grocery-anchored shopping centers will be a favored asset class for investors, particularly for properties in class-A locations. He goes on to mention that retail investment activity should remain strong in the near future as capital should remain plentiful and cheap.
This trend in the shifting make up of shopping center tenants is relatively new but quite successful. Diversifying tenant mixes provides entirely unique shopping experiences for consumers, drawing higher foot traffic levels by giving consumers more reasons to visit a retail location.
As retail vacancies arise, it’s an opportunity for landlords to restructure their shopping centers or major malls to align them more closely with the desires of today’s consumer and the demands of the local market. The headlines of major retailers shuttering stores may seem like doom and gloom, but in reality, this presents numerous opportunities.
The volatile retail sector has spelled trouble for a number of historic brands. Landlords of shopping centers and major malls should keep an eye on the challenges these companies face, knowing there are always savvy, thriving competitors ready to take any vulnerable market share. Vacancies resulting from major store closures offer shopping centers a unique opportunity to reinvent themselves to keep up with the changing retail market.
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