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Why Are So Many More Stores Closing Than Last Year?

It may seem like a paradox: National retailers have already announced more store closures this year than all of last year, but sales numbers have remained healthy amid high consumer confidence.


The simple answer, one that has been repeated ad nauseum for years now, is that consumer preferences are changing, and the closures represent the stores that could not change with them.

But under the surface of the growing sales is a secular change for which there is no real estate fix.

Non-store sales represent a growing portion of overall retail sales. The retailers that are expanding are avoiding much of the space that is going vacant, and not at an overall pace that can sustain occupancy levels long-term, according to a February report from Green Street Advisors.

The most proactive landlords with the best-positioned shopping centers will be able to adapt, but even then it could take costly redevelopments and more leasing turnover than ever before. Everyone else could be in deep trouble.

Just as Sears was synonymous with retail ingenuity for nearly a century, it is now the poster child for brands that are falling by the wayside in today’s climate. As it flails in bankruptcy proceedings to avoid liquidation, it faces three chief issues that all retailers closing stores in large numbers at least partially share: a failure to adapt, bad real estate and high debt burdens.

Failure to adapt

E-commerce may be on an explosive growth trajectory, but it did not arrive overnight. Successful brands have refreshed their corporate branding, embraced omnichannel shopping to highlight the advantages of their physical stores or redesigned those stores to enhance the shopping experience, CBRE Global President of Retail Anthony Buono said.

“Retailers that aren’t adapting to this new reality and using an omnichannel orientation — outlet stores, e-commerce, partnerships, licensing agreements — are the ones that are suffering from closures,” Buono said. “That’s the biggest differentiator that I’ve seen.”

Sears did none of those things, or at least not until it was too late to make much difference. Toys R Us, Payless ShoeSource, Pier 1 Imports and others have run into similar issues with complacency.

Bad real estate

Indoor malls — particularly those far from the country's biggest cities — have taken the most lumps of any type of retail real estate in the past few years, with only the elite among them still thriving. Sears' only remaining stores are in these select few locations.

Convenience and ease of access are more emphasized than ever, and department stores inside fortress-like malls with seas of surface parking are antithetical to those modern values.

The struggles of department stores and malls are to some extent a chicken-and-egg issue. An August 2018 IHL Group study claimed, “The retail struggle being reported is really a mall struggle,” but the Green Street Advisors report cited anchor obsolescence as the single biggest issue dragging down malls.


JCPenney and Macy’s have had their own issues, but have been quicker to adapt and modernize their brands — especially Macy’s. Power centers sprawled in otherwise sparse suburban areas have similarly lagged behind their counterparts in denser suburbs or more central junctures.

Debt burdens

Of all the issues facing struggling retailers, onerous debt might be the hardest to overcome. It felled Toys R Us and The Sports Authority in recent years, has caused Payless to close over 2,000 stores this year and has been the anvil around Sears’ neck. The 126-year-old chain had to sell some of its most valuable assets just to stave off obliteration.

“If [a retailer] has large debt coming due, it has to either refinance that debt, sell itself or go public, and the market isn’t receptive to any of those options,” BET Investments President Michael Markman said.

The majority of national retailers with distressing levels of debt are owned by private equity companies, which leveraged the companies to finance acquisitions. Private equity-owned retailers are significantly more likely to go bankrupt than publicly owned ones, according to a RetailDive report.

“To some extent, landlords are exposed, because they don’t have any control in the situation," Buono said. "Retailers can be successful in their shopping center, but because the retailer is highly levered, it isn’t doing well overall and closes [stores].” 

How landlords can adapt

A large portion of the stores closing in shopping centers and malls are leaving behind footprints that are tough to fill all at once. The brands in the ascendancy, like TJX, Ulta, Five Below and others, prefer 20K SF boxes to the 90K SF chains like Kmart and Toys R Us are abandoning.

One of the most common responses from landlords has been to chop up the larger boxes and redevelop them to fit multiple new tenants. The initial process is capital-intensive and is not always feasible, but more than pays for itself if leasing is a success, Markman said.

“If you have good real estate and you’re coming off an old, $4/SF [Kmart lease], you should be able to put new tenants in and get a return that far exceeds what you’d get if you were able to buy one of those [redeveloped] boxes on the open market,” Markman said.

The entrance to the Christiana Mall in Northern Delaware as of September 2017

Even some retailers that have avoided being forced to close large numbers of stores have acknowledged that they have a real estate problem. Kohl's has favored stand-alone locations to malls, but has been downsizing stores to more efficiently use their space. That can be a boon to landlords looking to add revenue streams, but it can also be a headache.

“Where people are having trouble [filling space] is when you have a larger-format retailer giving back space, that retailer still has specific requirements for their frontage and what kind of space they give back," First Washington Realty National Leasing Director Wright Sigmund said. "So the question is whether that remaining square footage is leaseable.” 

Just as it has been easier for retailers to stay ahead of shifting trends than play catch-up, some wonder if landlords should be more proactive in replacing outdated retailers before they even vacate. In most cases, hanging on to a store is easier than trying to terminate a lease early and sink capital into redevelopment, but Sigmund and Markman both admitted to considering it.

“Some tenants I’ve proactively tried to buy out depending on the quality of the real estate, and some you just wait out and see what happens," Markman said. "If the real estate is high-quality, I try to recapture the space. Most landlords won’t do that though, because it’s very hard to buy a tenant out of the lease.” 

Markman noted PetSmart as a potential buy-out candidate, while Sigmund said that Office Depot is a candidate for either a buy-out or a partial recapture of square footage. 

A less secure future

Finding a new tenant is the all-consuming question when it comes to dealing with retail closures, and it has only become more complicated. The list of national tenants in expansion mode with footprints that would fill even a portion of anchor spaces is considerably shorter than the list of retailers either closing stores or making small tweaks to store counts and locations, Buono said.

“The biggest problem with retail right now is the shrinking base of non-restaurant, non-fitness tenants to anchor any shopping center right now, whether a neighborhood center, power center or mall," Markman said. "So it puts you in a situation where you have less leverage with tenants, and they all know that.” 


Restaurants and fitness centers are much more likely to be seeking space, and while they have buoyed many retail centers, they are inherently riskier than department stores and soft goods retailers were in their heyday.

“Restaurants and gyms tend to be the types of tenants that don’t necessarily last through a 10-year cycle, so there will be more of a revolving door," Markman said.

The legacy restaurant brands like Applebee's that take large footprints in shopping centers are going through similar struggles, while the operators with the most buzz are likely specific to one's region with weaker credit.

“For food and beverage operators, it’s pretty nuanced," Sigmund said. "You want the local operator who’s enthusiastic and tuned into what local consumers want and can build a following. But food and beverage can always be risky, and even the best operators can have trouble.

“The tough ones are when [restaurateurs] have a good idea, but they’re brand-new, without a history of sales. So you have to be thoughtful and make a decision based on real data.”

Even if a landlord is as proactive as can be, finding tenants more often and redeveloping space more frequently to accommodate them can be a financial and mental strain. It will likely be worth it for the best real estate; for everyone else, nothing is certain to help.

“I think we’re in this pendulum swing where there’s going to be a coming together of e-commerce [and brick-and-mortar],” Markman said. “In the right location and with the right mix of uses, I feel like we’re really about to turn the corner.”