As traditional retail stores close and vacancies mount, landlords across the country appear newly receptive to leases as short as a week, eschewing the typical 10-year time frame, even in locations that once shunned limited stays.
The upswing in pop-up stores, as the short-term placements are called, is playing out in all sorts of ways, and in all sorts of places — including dark malls, former grocery stores and shuttered art galleries, according to real estate brokers, landlords and tenants.
For retailers, the stores can offer lower rents and far less commitment. For the landlords, the reason is just as clear: A short-term tenant is better than no tenant at all.
“Landlords have their backs against the wall right now,” said Samantha Elias, the co-founder of the Vintage Twin, a secondhand clothing company whose stores frequently pop up in Manhattan. “I tell them that some money is better than no money, and I promise not to bother you.”
A new research report from Fung Global Retail & Technology, an international think tank that follows retail and technology trends, uses hard data to outline what retail property owners and managers already know—store closing announcements this year have been off the charts.
Fung Global researchers found that year-to-date in 2017, store closing announcements in the U.S. increased by 97 percent year-over-year, to 3,296 locations. The majority of retailers closing stores are typical mall tenants—department store operators and apparel and electronics sellers. The chains with the highest number of announced store closings, for example, include apparel retailer Rue 21 and shoe seller Payless Inc., each with 400 closings apiece. Apparel chain The Limited comes in third, with 250 announced store closings.
The first three months of the year boded well for the industrial sector, which remains red-hot, hitting record low vacancies nationally and record net occupancy gains. Below are five key trends investors and commercial real estate players should be aware of within the industry.
National industrial vacancy levels hit 30-year lows this quarter. Vacancies continued to decline across the country by 20 basis points in Q1 to 5.3%. This is 300 basis points below the 10-year historical average of 8.3%, Cushman & Wakefield’s Industrial Market Beat reports.
For more than 50 years the heart and soul of many American communities was not Main Street but rather the big malls outside of town, the places where you could meet friends, have a meal, shop, get a job, or just hang out. The modern mall was a place to behold, a heated and air conditioned behemoth and a world unto itself, a world which has now become much smaller in recent years.
Old and familiar retail names are now downsizing and laying off — think of Radio Shack (closing 552 stores), Wet Seal (173 stores), HHGregg (88 stores), Limited (all 250 stores), BCBG Max Azria (120 stores), Family Christian Stores (240 stores), JC Penney (140 stores), Macy’s (63 stores), Kmart (108 stores), Sears (42 stores), and even retail giant Walmart (154 stores in the US). The situation is so dire that a website exists to track the carnage, DeadMalls.com.
And yet the prospects with malls may not be as dreadful as the headlines suggest.
“It’s a binary situation where strong malls continue to do well and then there are malls that are duds,” Steve Kuritz, managing director at the Kroll Bond Rating Agency, told The Wall Street Journal.
One morning in late 2015, on Sears‘ vast Illinois campus, more than a dozen employees huddled in a videoconference room on a floor dubbed “B6.”
There, two mid-level employees were preparing a presentation for the CEO, Eddie Lampert, when their boss rushed in with some last-minute advice.
On a chart pad he wrote three words.
“He looks at the presenters and says, ‘Do not say these words to that guy,'” according to a former Sears executive who described the meeting to Business Insider. “That guy” meant Lampert, who would soon appear on a giant projector screen at the front of the room, beamed in live from a home office inside a $38 million Florida estate — 1,400 miles away from headquarters.
The pad with the three words was out of sight of Lampert’s video feed. One of the words on it was “consumer.”
The stakes were high. If any of those words were uttered in front of Lampert, the two presenters would “get shredded” by the CEO, whose frequent tirades had fostered a climate of fear among the company’s most senior managers, said another person — this one a former vice president.
Traditional lenders like banks and insurance companies have slowed their commercial real estate lending activity, and experts foresee the trend continuing well into 2017.
Lending was down 3% last year from 2015 levels, and lenders closed $491B worth of mortgage loans in 2016, according to new statistics from the Mortgage Bankers Association. The slowdown in lending was spurred by fewer property transactions taking place in need of loans, and the downtrend is expected to continue this year as investors grow increasingly cautious in their dealings. Investors spent 10% less on U.S. commercial properties during the first two months of 2017 than they did during the same period a year ago, the Wall Street Journal reports, and experts attribute the decline to rising property prices. One sector that is seeing a marked decline in lending activity due to fewer deals and tighter standards is retail. Equity Group Investments chairman Sam Zell recently said commercial real estate is overpriced, making it hard for buyers to justify entering the market. And with the sector experiencing an excess of bankruptcies and massive job cuts, mall landlords are finding it more difficult to secure loans.
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The focus in commercial real estate finance is often on big national banks like JP Morgan or big foreign ones like Deutsche Bank, but it would be a mistake to overlook the Southern lender that’s been making waves in the commercial real estate industry, bringing a little bit of the Ozarks to the world of high finance.
Bank of the Ozarks, based in Little Rock, Ark., broke into CrediFi’s ranking of the top 10 New York City lenders in the fourth quarter of 2016 with over $500 million in loan originations and a 3.0 percent market share.
The bank had previously made the list in the first quarter of 2016, ranking as No. 7, with over $400 million in financing and a 2.4 percent share of New York City’s commercial real estate market, but dropped from the top 10 list in the second and third quarters.