As of October, retailers had announced plans to close more than 130 million square feet of store space this year, according to CoStar. More than half of this space is coming from five big-name retailers: J.C. Penney, Macy’s, Stein Mart, Bed Bath & Beyond and Pier 1 Imports.
Experiential retail has been hit hard, too, with retailers such as 24 Hour Fitness, Gold’s Gym, Check E. Cheese and many restaurants announcing store closures this year, too.
COVID-19 is the big cause of this record-setting pace. But it’s not the only one. As CoStar retail analysts say, the retail sector was facing challenges long before the pandemic hit. The growth of ecommerce and online shopping had already hit traditional brick-and-mortar retailers hard, according to the company. CoStar says that the pandemic, and the further boost it has given to online shopping, has only accelerated these struggles.
The seismic shift in consumer shopping behavior in the pandemic is turning the retail industry into a tale of nonessential versus essential merchants that’s beginning to show up in leasing activity.
The deep decline in spending at apparel and department stores, compared with jumps in demand at grocery and home-improvement stores as well as in e-commerce, has continued since the outbreak of the coronavirus in the U.S. in March, according to Abby Corbett, managing director and senior economist in CoStar’s Chicago office.
“Despite a gradual reopening of the economy, several retail indicators have softened from their initial rebound registered throughout June and July,” Corbett said in a new video. Retail sales in August edged up only 0.6%, according to the Census Bureau.
Much of that, of course, was driven by online sales that have plateaued on a monthly basis but still sported a 22.4% year-over-year jump in August. From February to Sept. 20, they logged a 20.6% gain, according to CoStar research, with an 11.8% increase at home-improvement and garden centers and a 10.4% rise in sales at food and beverage stores.
Retailers with stronger online presences, such as Target and Walmart, have benefitted from the growth of online sales during the pandemic. Many consumers have increased their online purchases during the last seven months as retailers shut brick-and-mortar stores. And while this has helped bigger retailers with strong websites, it’s hurt others, especially apparel retailers, restaurants and entertainment centers.
Leasing at shopping centers and malls, where apparel and department store retailers are the major tenants, plummeted 75% relative to the average activity registered year to date over the past four years.
“It comes down to people feeling safe when they are shopping,” said Robin Trantham, retail consultant with CoStar Advisory Services. “A lot of retailers and center owners have put money and resources into making sure their centers are more than safe enough to shop at. That is of high importance right now. But a lot of people still don’t feel safe shopping in person.”
And don’t expect things to look better for traditional retailers soon. CoStar predicts that during the next 12 months, pandemic-related closures will drive a further increase in retail vacancy rates. The company predicts that mall vacancies will increase by more than double that of the next-highest retail center type, while power centers and community centers are expected to suffer through significant vacancies.
Leasing at power centers, the outdoor shopping areas that often have several big box stores, is falling too, but not to the extent of shopping centers and malls. Power centers with essential retailers, wholesale and home-improvement tenants have seen only a 31% drop.
Meanwhile, restaurants continue to be in a world of hurt that the upcoming cold-weather season might greatly exacerbate by eliminating outside dining. The National Restaurant Federation tallied a 43% fallout of full-service operators that said their eating establishments will be forced to close their doors six months from now if business conditions don’t vastly improve.
“We still believe that the long-term threat to retail is ecommerce and the growth of ecommerce,” Trantham said. “Experiential retail is not as exposed to the threat of ecommerce as is an apparel or traditional retail tenant. It is still a good play for a shopping center to take on an experiential tenant over the long-term over one that is highly exposed to the threat of ecommerce.”