SACRAMENTO—US shopping center vacancy stood at 7.9% at the end of the first quarter, having declined just 40 basis points from the year-ago period. Yet that represents stronger performance than it might appear on the surface, coming as it does “at the close of a quarter that saw the highest level of store closures since 2010,” says Cushman & Wakefield’s Garrick Brown in a new report.
The first few months of the year are typically “store closure season” anyway, but Q1’s activity on this front was heightened by multi-channel retailers looking to right-size their portfolios for e-commerce. During the quarter, “The retail market also continued to feel pressure from longer-term closure plans already in place from chains active in sectors where e- commerce has been an even more disruptive threat, such as office supplies, bookstores and consumer electronics,” according to Brown, VP of retail research, Americas, writing in C&W’s US Shopping Center MarketBeat.
Not only closures by the hundreds—by the likes of Macy’s, JoS. A. Bank, American Eagle and Kohl’s—but also retailer bankruptcies marked Q1 and are likely to continue as the year progresses. As Q1 gave way to Q2, for example, sportswear apparel chain PacSun filed for Chapter 11, a move which Brown notes could results in 600 locations being shuttered, while Sport Chalet closed all 56 of its locations. M&A activity could also boost store closures as 2016 as retailers look to eliminate redundancies.
Against this unpromising backdrop, shopping centers’ bottom-line result—Q1 was the 16th consecutive quarter of vacancies either holding steady or declining—looks pretty solid. “We track just under 4.0 billion square feet of shopping center space (including community/neighborhood, power/regional, strip and lifestyle centers) across 65 major US markets,” Brown writes. Over the course of Q1, availability fell by over 545,000 square feet to just over 312 million square feet of total retail vacancy.
“Vacancy levels declined or were unchanged in 40 of those 65 major markets,” according to Brown. “Of the 25 metropolitan areas that experienced increasing vacancy trends, only three saw increases in excess of 50 basis points and none recorded increases over 80 bps.”
If e-commerce, M&A and financially struggling retailers all have posed challenges to shopping center growth, other factors have encouraged it. “Ultimately, shopping center growth in the post-recession era has focused around concepts that do not directly compete with e-commerce—such as food or service-related retail—and those at the two ends of the economic spectrum, with mid-priced retail of all stripes generally in flat or contraction mode,” writes Brown.
In the food arena, Whole Foods is helping spur growth, especially as it rolls out its new Millennial-focused Whole Foods 365 concept, while the likes of Trader Joe’s and Fresh Market remain in expansion mode, according to Brown. Restaurant retail is coming on strong, with formats ranging from “better burger” franchises such as Smashburger and Shake Shack to Asian fusion also active.
Outside of food chains, shopping center growth is being driven by discounters and off-price concepts. “Dollar store chain growth since 2010 has equated to a new store opening in the US every 4.5 hours,” Brown writes, while off-price apparel chains such as TJ Maxx and Marshall’s are being joined by department store brands introducing their own concepts, such as Nordstrom Rack.