Retail has offered some much-needed relief during and after the pandemic, with its distress rate dropping by 210 basis points between February and March. While store closures have occurred, many retailers have thrived by adopting omnichannel strategies. Another indicator of the sector’s health: Anjee Solanki, national director of Colliers’ Retail Services & Practice Groups, has noted that there are now waiting lists for entry into shopping centers and soon-to-be vacant spaces.
Despite these positive developments, Trepp identified several significant challenges facing the industry. Consumer sentiment is notably low, as reflected by the University of Michigan’s regular polling, and the Conference Board’s monthly confidence index of current conditions has fallen to its lowest level in 12 years.
Trepp outlined four main areas where retail conditions could deteriorate: exposure to CMBS, sales performance in 2024, the continued growth of e-commerce, and the consolidation of market power.
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The delinquency status of CMBS loans backed by commercial real estate is closely linked to the success of retail tenants, since financial troubles can directly impact property cash flows. For example, Big Lots, which filed for Chapter 11 bankruptcy in 2024, will shrink from nearly 1,400 stores at the start of the year to between 200 and 400, and as they reject leases and vacate locations, the current delinquency rate of 6.07% is expected to rise.
However, Trepp points out that high delinquency rates are not always the retailer’s fault. JC Penney, for instance, is present in 191 properties with CMBS debt, where 12.71% of the outstanding balance is non-performing. Macy’s has a non-performing loan balance of 6.78%, Costco is at 15.03%, Dillard's is at 11.35%, and Target is at 16.88%.
Conversely, Neiman Marcus reports a 0% non-performing balance, while Kohl's and Target each have 3.11%. The percentage is 5.01% for Family Dollar and Bloomingdale's is 5.04%. This dynamic means that risks can flow both ways: troubled loans can threaten store locations, which become risk factors for the retailers themselves.
Retail sales data from the past year show that some categories performed better than others, improving financial conditions for property owners in those segments. Office supplies saw a 16.1% decline between 2023 and 2024, sporting goods fell 3.8% year-over-year, furniture and home furnishings declined 2.2% and department stores dropped 1.3%. In contrast, non-store retailers experienced 8.1% growth, restaurants and other eating places rose 5.5%, automotive parts and tire stores increased 3.8%, while warehouse clubs and superstores grew by 3.3%. Pharmacy and drug stores, despite facing challenges, posted a 3.3% sales increase, while clothing stores were up 3%, grocery stores rose 2%, and electronics and appliance stores climbed 0.9%.
The growth of non-store retailers underscores the ongoing expansion of e-commerce, with 2024 sales up 8.1% year-over-year, compared to 2.8% growth in total retail sales. Trepp also highlighted the increasing consolidation of retail power, noting that Costco, Walmart, and Amazon together accounted for 11% of all retail sales in 2014. But now they all represent approximately 17% of total sales and 57% of retail sales growth.
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