S.E.C. Real Estate Observer

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By Chuck Sutherland, S.E.C. with contributions by John Brennan

I was thinking about vacancy issues in retail properties the other day while looking at an offering package of a retail center, and I decided to do a little research. The following are some of the ideas I found most compelling.

The Chinese word for “crisis” is widely known as being composed of two Chinese characters signifying “danger” and “opportunity.”

The Crisis

You could say that the retail store world is in a state of crisis—with both danger and opportunity—for retailers, shopping center owners, and lenders. More and more vacancies are appearing in shopping centers as the number of store closures continues.

Stock values for JCPenney, Macy’s, Kohl’s, and Dillard’s have substantially declined this year because of lower than expected sales and earnings for those companies and the entire retail store group. Sears is closing a large number of stores, and many do not expect the chain to survive at all. Those chains are facing the “danger” side of crisis.

All in all, an estimated 7,000 to 10,000 retail stores will close in 2017. Amazon is the major leader in seizing opportunity in the face of the retail crisis. Although Amazon saw an increase in revenue in the 2nd quarter, its net profit of 40 cents per share was a full 71% below the market projection of $1.40 per share. Their stock value fell somewhat, but Amazon is seizing the “opportunity” in home food delivery with its acquisition of Whole Foods.

The retail businesses are all in turmoil, looking for strategies they can use to either survive or profit. Again, the retail store “crisis” is both “danger” and “opportunity.”

What can you do to protect yourself or profit in these changing times for retail? These are a few ideas to consider, but they are by no means all-inclusive.

Reduce the Danger and Embrace the Opportunity

1. One expert said that we don’t really have a big box vacancy problem but an “under-demolished” problem. Consider demolition where necessary.
2. If you own shopping centers or other retail, seek to minimize the “big box” footprint. In new developments, consider what the development would look like without a major “big box.”
3. In developing, considering reducing the overall size of the retail development: John Brennan, a retail expert in Dallas, stated, “One developer that I know builds Wal-Mart shadow anchored retail. Beginning about 4 years ago, he lowered his standard footprint for the retail centers that he builds from about 17,000 square feet to only 7,000 square feet or less.”
4. If you are dealing with vacancy, look for “short term” lease solutions. One such solution is transforming vacant space into “pop-up stores,” which are stores that only have a short lifespan as retailers test different retail concepts. The Lionesque Group coordinates just such a solution. Also, large vacant space could be reconfigured to operate as a food court or entertainment venue.
5. Before putting a lot of money into improvements for tenants, do a thorough risk assessment of the future of that tenant. Be sure that the tenant’s company will be around long enough to pay for the improvements.
6. Focus on what retail is expanding even as the mainstream units are contracting. Fast food companies are expanding overall in the United States even as family style restaurants are declining. For example, the owners of Applebee’s and IHOP expect to close up to 160 of their US stores.
7. Look to create smaller retail centers focused on something other than general shopping. While centers focused on food are typically smaller than general shopping centers, they are less subject to the ups and downs of general retail business in today’s environment. Restaurant-only shopping centers are becoming popular with many developers to take advantage of the growth and popularity of fast casual restaurants.
8. “In general, service retail, including dry cleaners; hair salons; donut shops; medical and professional practitioners; insurance offices; and small, fast, casual restaurants, remains unaffected by the Internet and is a popular choice of both developers and investors,” said John Brennan.
9. If a shopping mall is antiquated, find a new use for the land. In Dallas, the Valley View Mall in North Dallas is being demolished to make way for an entirely new, high-density multi-use property. “The development will bring to the northern border of Dallas nearly 1 million square feet of retail and office space, an 18-floor hotel, a 10-screen luxury cinema, a 183,000-square-foot health and wellness center, 1,000 new apartments, and the 20-acre park Midtown Commons” (The Dallas Observer, Friday, June 23, 2017).
10. Ultimately, the huge power centers and regional malls are something most of us will have neither the means or opportunity to tackle. Many of these have no major problems at this time, but some do and will. These are the types of properties that will require enormous amounts of money, creativity, and talent to resolve their growing issues.
11. This is the age of retail disruption . . . of “crisis.” Stay out of danger and embrace the opportunity!

These were some of the ideas I found about retail vacancy issues. There are those who deal with retail properties exclusively and may have many more solutions.