Where Commercial Retail Growth Is Strong

Dated: 02/13/2017

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Where Commercial Retail Growth Is Strong 

While fashion retailers and department stores have been the hardest hit by changing consumer behavior, real estate investment trusts have recently signed anchor leases with retailers that include fitness chains, leisure sporting goods chains and off-price retailers. It is also seeing strong demand for store space from arts and crafts, home-improvement, theaters, beauty, pet supplies, furniture, fitness and entertainment, said Conor Flynn, Kimco Realty Corp’s president and CEO. 

“To be clear, physical retail is not going away, and will continue to be critical to the long-term success of the omni-channel approach to best serve today’s customers,” Flynn said. “However, it is now more important than ever to have dominant locations with the best tenant line up.” 

Food-related retail remains the hottest growth category, said Cushman & Wakefield’s Brown. 

In most U.S. markets, between 60% and 70% of local deal activity is being driven by either restaurant or grocery concepts. Restaurants remain extremely active despite the fact that restaurant closures are also on the rise. 

“Most of the growth in restaurants is among fast casual chains, many of which are new concepts fueled by private equity money,” Brown said. “At the other end of the spectrum, most of the closures are among casual dining outfits and weaker franchise-driven fast-food or sandwich shops.” 

Store Closures Seen Spreading Beyond Fashion, Department Stores

Former trendy fashion clothing retailer The Wet Seal LLC became the latest mall-based retailer to succumb to changing consumer buying habits. The company this week filed for Chapter 11 bankruptcy and is holding going out of business sales at all of its 171 stores in 42 states. It is the chain’s second trip through bankruptcy court in two years.

The forces of 'creative destruction' sweeping through the retail sector appear to be spreading quickly into other retailing sectors too. Outdoor sporting goods retailers and specialty shops too are starting to show signs of sales distress.  

Eastern Outfitters, which operates more than 85 stores in the Northeast under the banners Eastern Mountain Sports and Bob’s Stores, also filed for bankruptcy this week and is pursuing a sale of the company.

Marbles: The Brain Store, with 37 locations in some of the best performing malls on the West Coast and in the Northeast, also filed for bankruptcy this week. It is seeking to close all of its game stores.  

Fashion Faux Pas

The fashion retail market for young women in which Wet Seal operated is extremely competitive, as evidenced by other recent Chapter 11 filings by, among others, Aeropostale, American Apparel, Pacific Sunwear of California, Quicksilver, Deb Stores, dELia*s and Body Central Corp. More recently, The Limited recently concluded liquidation sales and is winding down its business.  

Each of those retailers has suffered from some combination of the same challenges that ultimately compelled Wet Seal’s liquidation: declining mall traffic, fast-changing fashion trends, expensive commercial leases, and the increased popularity of online shopping.  Other fashion retailers may be on the cusp. Moody's Investors Service recently downgraded debt ratings on True Religion Apparel Inc. and Nine West Holdings Inc. The credit rating downgrades reflect ongoing earnings declines, high debt levels and leverage burdens, according to Moody’s, which sees higher default risk or further deterioration in recovery prospects for both retailers.  

B and C Properties Expected to Bear Brunt of Store Closures  Retail closures and bankruptcies were up significantly in 2016. Over the course of the year Cushman & Wakefield tracked more than 4,000 store closures made by major chains, a figure that surpassed 2010’s record 3,600 shuttered storefronts. In addition, there were 26 major US retailer bankruptcies during 2016 compared to 22 in both 2015 and 2014. 2009’s record of 37 major U.S. retailer bankruptcies still stands.  

“Despite improving consumer metrics and a fairly solid overall holiday sales performance, the heightened levels of closures recorded in 2016 is likely to be surpassed in 2017," said Garrick Brown, Retail Research, Americas for Cushman & Wakefield. “We anticipate as many as 5,000 major chain closures in the coming year -- a 25% increase over 2016.”  

The combination of more store closures and slowing growth in other categories will finally take its toll on vacancy levels, Brown said. Class B and C properties will bear the brunt of impact as the divide between Class A retail and other asset types widens.  

"We are projecting stabilized mall occupancy to be relatively flat from prior year end, but expect that we will have a decline in the first part of the year to absorb the January store closures from The Limited, Wet Seal and Aeropostale,” said Farzana Khaleel, CFO of CBL & Associates Properties Inc. (NYSE:CBL).  

While neighborhood/community, lifestyle, power/ regional and strip centers are generally expected to fare better than mall properties in the coming year, they won't be completely immune.

Outdoor sports gear retailers such as Eastern Mountain and Bob’s Store tend to operate in power and lifestyle centers and are now starting to feel the effects of shifting consumer behavior.

Deckers Outdoor Corp., a competitor to those two chains now in bankruptcy, announced this week it will implement a chainwide optimization plan for its stores and an office consolidation. The company is in the process of evaluating its portfolio of retail stores but has already identified 24 that are candidates for potential closure.  

“Unfortunately, brick-and-mortar traffic remains challenging and we expect our stores will continue to face headwinds for the foreseeable future,” said Dave Powers, president and CEO of Deckers. “In the meantime, the company continues to be focused on implementing a strategy aimed at meeting the changing needs of our customers in the industry.”  

And by that Powers means moving more sales online.  

Source:  http://www.costar.com/News/Article/Wet-Seal-Throws-in-the-Towel-as-Retailer-Distress-Ramps-Up/188653?rpt=1

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Raul Acuna - CA BRE #01708572

Raul Acuña - Raul has been in the Real Estate Industry since 2005. Raul began working at an REO brokerage before opening his own REO company in 2010. Raul has a business degree from Cal Poly Pomona, ....

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