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There’s Another Culprit Behind Retailers’ Mass Closures — And It’s Not E-Commerce

Though headlines constantly point to e-commerce as the lead culprit for retailers' shuttering frenzy, there is another factor less frequently explored that is also to blame: the overbuilt state of the sector.


There is just too much retail real estate, and that was the case prior to the financial crisis and before e-commerce gained momentum and really started eating away at brick-and-mortar stores’ sales. CoStar Group real estate economist Ryan McCullough said overambitious expansion plans coupled with the slowdown of the Great Recession and the growing prevalence of online shopping has taken its toll on the sector.

“The overreaching retail strategy during the last cycle was expansion,” McCullough said. “We saw rapid growth in store count and not necessarily in the strongest locations.”

McCullough said retailers’ rapid build-out plans were in many cases an effort to appease investors and boost stock prices and analyst ratings — but these plans have led to less productive stores that are stretched too thin in many markets.

For context, McCullough said retailers on average generated nearly $400 in sales/SF in 2000 through 2003, then in 2004 oversupply began to hit the market and those productivity numbers dropped to about $371/SF and dove lower from there when the recession hit. Though productivity levels started to recover in 2014, they have yet to return to their pre-recession levels. As of 2015, store productivity was about $336/SF, and McCullough said it will take more than stalled construction to come back from these lows.

“This could be improved by retailers improving their sales enough so it’s not a problem, but we think there is not enough growth out there in the marketplace considering the effects of e-commerce and the impact of Baby Boomers retiring,” McCullough said.

Some markets where retail is overbuilt — Chicago is 20% overbuilt; Phoenix, 18.8%; and Atlanta, 18.6%, according to McCullough — also suffer from stores that are not productive and demographics that show there’s not enough activity in the market to grow their sales. In these markets, retailers choosing to shrink their footprint may be the wisest choice. On the other hand, San Francisco and Seattle are both highly productive markets that benefit from thriving populations and an influx of young talent moving to the area.

What’s To Become Of The Excess Retail Real Estate?


With such low productivity levels, fewer retailers can justify keeping stores open that are losing so much money in sales per square foot. That is why department stores and anchors like Macy’s, Sears and Kmart are slashing their portfolios — cutting stores that do not generate enough in sales to pay for overhead costs.

In a recent report CoStar released, the leading commercial real estate information provider estimated that within the next few years more than 1B SF worth of retail real estate will be rationalized — meaning those stores will either close, be consolidated or converted for an alternative use.

Given the excess of available retail real estate already on the market, it is getting increasingly difficult for mall owners to sell properties, especially considering the limited pool of buyers. Most of the shuttering department stores and mall-dependent retailers are closing locations in weak centers with declining foot traffic — which are not easy stores to sell

“We’re not saying 1B SF will cease to be retail, though some of it definitely will close and not remain in current use,” McCullough said. “What it becomes depends on the function of the location — [whether that’s] medical, university campus, it’s hard to say what the individual locations will come down to.”

To dive further into  the state of the retail sector be sure to check out Bisnow's National Retail West Coast Series on March 28.