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C+CT

RECon: Store closings mark return to retail health, CoStar exec explains

May 22, 2018

The word “e-commerce” did not even come up until the very end of a Monday presentation about retail real estate’s challenges. Instead, speaker Suzanne Mulvee, research director at CoStar Group, talked about a perfect storm of overbuilding during the 30 years leading up to the Great Recession; a demographic shift that she said “turned against” retailers; and a change in consumer shopping preferences.

But the healing has begun, asserted Mulvee, in her session, titled "Shrink to Grow," and it is time for developers and retailers in the strong trade markets to go on the offense. Mulvee cited store closures as being one of the biggest reasons for this recovery. And in fact, she noted, more closures are to come: With some 95 million square feet of store closures already announced thus far this year, it is a sure bet that 2018 will surpass last year’s 105 million square feet.

“A lot of folks like to point to the disruption in the retail market and say, ‘It’s about online shopping,’ ” Mulvee said. “I don’t think it’s about online shopping — I think it’s about oversupply; I think it’s about demographics; and it’s about weathering the worst recession since the Great Depression.”

Mulvee bases her positive outlook on a confluence of trends. Low unemployment rates are beginning to foster average annual wage growth of about 4 percent. Additionally, the Millennials are now entering the prime earning-spending age range of 35 to 54. That same demographic trend among the boomers helped drive the wave of overbuilding, Mulvee says, but retailers and developers were unprepared for any spending collapse as boomers aged beyond those prime spending years.

“Store closures are actually a really good thing for the economy”

Against that backdrop, it is possible that limits on new construction in combination with the closures of weak stores can sustain pockets of emergent strength in the retail market. Retailers that have cut back on their portfolios, such as Abercrombie & Fitch, Best Buy, Children’s Place and Gap, have begun realizing same-store sales growth for the first time in several years, noted Mulvee. And this, she said, proves that it need not take many closings for retailers and developers to go from weakness to strength. 

“Store closures are actually a really good thing for the economy,” she said.

Of course, trade-area strength still plays a critical role in retail real estate. Well-located malls that have lost a big department store have been able to re-lease 70 percent of that space within a year, versus a 20 percent re-leasing rate for malls in the weakest locations.

“We’re seeing an end to this perfect storm,” Mulvee said. “But it comes down to trade areas, and we’ll see retail centers in the best [ones] continue to thrive, and those in the weakest probably won’t be retail uses anymore.”

By Joe Gose

Contributor, Commerce + Communities Today