Analysts: Closing of Weakest Stores to Benefit Shopping Center Performance
The national retail vacancy rate ticked up 10 basis points for the second consecutive quarter to reach 5.2% in the third quarter of 2017 as retail leasing and net absorption slowed despite continuing improvement in the broader economy and growing consumer spending power, according to CoStar analysts.
The slower leasing performance in the third quarter for the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – reflects the ongoing store closures announced by several major retailers. In total, retailers have announced a record 101 million square feet of store closings this year, on top of 83 million square feet of store space that went dark in 2016.
However, despite signs of decelerating leasing demand for the national and Philadelphia commercial real estate markets, some analysts speculate that record levels of store closures will eventually have a ‘healing effect’ on the market as the weakest shopping centers shut down or are repurposed.
This report on U.S. and Philadelphia commercial properties is being made through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.
Analysts argue that recent weakening of fundamentals does not necessarily justify the doomsday scenario suggested by gloomy headlines warning of a “retail apocalypse” or “Armageddon,” and the focus on the ongoing purge among national and Philadelphia commercial real estate properties masks the best-performing centers, many of which are adding stores and maintaining occupancy.
“Store closures have become a headline risk, and I think it is impacting the capital markets and pricing of retail property. But for shopping center owners and investors, these closures may be a necessary means to healing the market,” observed CoStar director of U.S. retail research Suzanne Mulvee in presenting the latest quarterly data during CoStar’s State of the Retail Market Q3 2017 Review and Outlook.
“Consumer spending (at the closed stores) needs to go somewhere, usually to another physical retailer, so we look at this trend as somewhat positive for the overall market,” Mulvee said. Surviving stores in the right locations “will ultimately come through this period even stronger than before,” added CoStar managing consultant Ryan McCullough.
One major issue contributing to concerns on Wall Street about U.S. and Philadelphia commercial real estate listings is the staggering amount of debt held by retail chains, incurred in part during the wave of leveraged buyouts by private-equity firms in recent years. For example, giant shoe retailer Payless Inc., which filed for Chapter 11 bankruptcy in April, incurred more than $700 million in new debt, including buyout borrowings, after being acquired in 2012 by Golden Gate Capital and Blum Capital Partners.
“If retailers can’t refinance the debt at reasonable rates, they will be forced into bankruptcy, and that gives them cover to break leases,” said Mulvee. “Capital is still positive on high-quality retail, but it is becoming even more bearish on weaker retail.”
The best-performing malls and shopping centers populating the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – will continue to attract tenants and retain value. Average and lower-performing properties will continue lose value and eventually close or be repurposed, according to the report.
U.S. retailers dealing with national and Philadelphia commercial real estate listings expect to open nearly 4,100 more stores than they will close in 2017, a conveniently overlooked fact in many news headlines focused chiefly on the number of store closings, according to “Decluttering the Retail Landscape,” a recent report by TH Real Estate. Competition from online sales is pushing weaker retailers out of business faster than ever before, but the report posits that should ultimately result in a financially healthier and more adaptable set of retailers and shopping centers that provide more appealing experiences and a compelling product mix for shoppers.
“When we subtract those non-competitive malls with vacancies of 40% or higher, we see a far different picture,” said CoStar’s McCullough. “It’s the troubled properties that lose a key tenant and set into motion an exodus of defections,” skewing the retail vacancy picture, he added.
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