This report was originally published by Tyler Durden at Zero Hedge
Retail real estate carnage is going to continue this year with no signs of slowing up, as Bloomberg reported this morning that over 77 million square feet of retail real estate has closed this year and that 2018 will easily pass 2017’s record of 105 million square feet closed. The latest example was the fall of the once massive Toys ‘R’ Us name:
The fall of the Toys “R” Us chain, with more than 700 U.S. stores, shows how much retail real estate has changed in just the last decade. When KKR & Co., Bain Capital, and Vornado Realty Trust took over the company in 2005, the buyers justified the $7.5 billion price, in part, because of the supposedly valuable properties that came with the deal.
If there was ever to be any silver lining to the complete carnage in the retail real estate space, it was the argument that has been perpetuated over the last decade or so: despite retail stores closing, the real estate would eventually be worth something.
This argument was made by real estate investment trusts as well as activist investors and analysts who tried to put a positive spin on the death of brick and mortar retail. Now, with more space freeing up, the bid under former retail property is at ask of falling off as supply is starting to get far ahead of demand:
Real estate can put a floor under the value of a retailer and make it easier for the company to borrow. Maybe a particular store concept doesn’t work out as consumers’ tastes change, but in that case, investors can always sell the land and buildings to someone with a better plan. Long-term leases can be similarly valuable. But what if the problem isn’t that a particular store is out of fashion, but that consumers are just shopping less at brick-and-mortar retailers in general? As more storefronts empty, the valuation floor will look wobblier.
This pace of closings puts 2018 on pace to pass 2017’s record of 105 million square feet of retail space closed:
At last count, U.S. store closures announced this year reached a staggering 77 million square feet, according to data on national and regional chains compiled by CoStar Group Inc. That means retailers are well on their way to surpassing the record 105 million square feet announced for closure in all of 2017.
It doesn’t look like the pace of these closings is going to slow anytime soon, either:
And with shifts to internet shopping and retailer debt woes continuing, there’s no indication the shakeout will end anytime soon. “A huge amount of retail real estate in the U.S. is going to meet its demise,” says James Corl, managing director and head of real estate at private equity firm Siguler Guff & Co. Property owners will “try to re-let it as a gun range or a church—or it’s going to go back to being a cornfield.”
So goes one set of stores, as go others. Despite the fact that the U.S. still has some of the most square footage of shopping space per person, there isn’t enough being spent at these locations to make them worth it:
Even though retailers have been retreating for years, the country still has about 24 square feet of shopping space per person, many times more than any other developed nation, according to research firm Green Street Advisors. Consumers aren’t spending enough offline to support such a generous amount. Vacancies are headaches for landlords, of course, but they also have a mushrooming effect. People may steer clear of a mall that has lost an anchor tenant or has an abundance of “for lease” signs in smaller spaces. Deserted big-box stores, their facades naked and parking lots barren, can spread a sense of blight for blocks around. Who wants to open a business next to a place that’s gone out of business?
The article finishes by pointing out that companies like Amazon and Whole Foods have still seen success using a brick-and-mortar retail concept. It’s possible that the space is simply just downsizing and becoming more efficient instead of disappearing entirely. Regardless, there seems to be a long runway to go in terms of retail real estate freeing up over the next couple of years. The trend of internet versus department stores also remains anything but encouraging.
And the outlook, with overlevered companies and lack of a serious bid under property prices, continues to look grim. Retailers are not going to be able to refi or recapitalize in ways necessary to try and grab onto lifelines. As the sector continues to collapse it’s going to be harder and harder to try and engineer turnarounds – this could lead to a self fulfilling prophecy of accelerating turmoil and collapse for the industry:
But not every deserted retail property can be turned into a gym, theater, or boutique outlet of a tech company. That reality will weigh on any investor thinking about scooping up a struggling chain with real estate assets today—especially buyers in private equity, who borrow heavily to finance their deals. “Retailers cannot support large debt loads,” says Perry Mandarino, head of restructuring at B. Riley FBR, an investment bank that’s worked on retail liquidations. “Add to that the possibility of a decrease in the value of other collateral, such as real estate, and the successful execution of a retail-leveraged buyout may be almost impossible.”
Almost a year ago to the day, we reported on retail closing setting up to hit a scorching pace in 2017. The narrative for 2018 stays the same, only worse. In early 2017 we pointed out the astonishing fact that “Barely a quarter into 2017, year-to-date retail store closings had already surpassed those of 2008.”
We asked in early 2017 if Amazon was assured of becoming the world’s first trillion-dollar stock, perhaps hitting the milestone even before Apple? Here is how the two names have fared since then:
The race is on.
Others have given up waiting for a recovery that seems always out of reach and are settling into what appears to be the new normal – but regardless, 2018 is setting up to, once again, break new ground in misery for retail real estate.
The death of retail? I rather doubt it. Women and teenagers love to shop. Sure, times change. Right now people are doing lots of direct shopping on the web. And retail mega malls reached to great heights before collapsing from the sheer weight of overgrowth. But, after things settle, and the thrill of opening boxes turns into a chore, they’ll be back. Especially, if quality products made 100% in the USA are on the shelf. Soon, I hope.
B, retail is going through some serious changes. In my city alone 40% of retail space is empty. There’s one small strip mall only three-quarters of a mile from my home that’s been totally empty for the past 2 years. One six-story building closer to me that use to have 2 of our local TV stations has been vacant for 4 years. Online shopping is the wave of the future.
TDBh, it isn’t just retail. It’s in my area a heck of a lot of small businesses. All those small manufacturing garages spaces in the industrial parks – over 2/3 empty around here. So many guys who have skills working for way less than they used to. Malls – mostly ghost towns. Strip shops – barely hanging on folks alternating with empty carcasses of once weres. Everyone scratching for whatever they can do to bring in a buck or two. Yeah, America’s being made great again all right.
As usual however, they don’t even talk about NET space. How much is being built? It’s insane, but I drive around a lot and see a bunch of new stuff going in. No doubt taxpayers are going to be on the hook.
We love to shop- but we are shopping at Rummage sales, thrift stores, the DAV thrift stores, goodwill and yard/tag sales. And Craigslist. I work the clothing section at our churches semi-annual Rummage sale for Missions, and that’s where I get my clothes, and for my grandchildren too. People give away millions of dollars of clothing every year. I get brand names that fit and are styles we like, for very little money. It’s the New Place to Shop!
They’ll be back. Yea. Just like all the mom and pops that got ran out of business.
Two years ago I told this community that robot androids would be life like in five years and ubiquitous in ten years based upon the demand for sexbots.
The latest reports indicate that buyers are especially eager for tranny bots with interchangeable sexual parts to service both men and women; perhaps a husband & wife or other couple. Maybe just a freak. 🙂
Additionally advances are being made in their emotional “responsiveness”. The latest development outside of Japan is in the UK where an especially life-like robot has been created to promote the new “Westworld”. Here’s the link:
In three more years these things may be so life like as to be virtually INDISTINGUISHABLE from a human being. EVERYONE will want their own programmable sexbot:especially if they can run errands, give the dog a bath, and clean the house or wash your car. Maid or butler, my peeps ???
Save your change. 🙂
Genocide by design. Only a fool buys into his own extinction. No thanks.
Perpetual needless wars, NAFTA, Taxes, Obama Care costs, its all by design to bankrupt the back bone of America the “Middle Class.” No brain surgery here. Bad Govn’t hijacked Policy by Bad Actors. They have us so broke they are worried that we have guns, and they want to take those guns away from us also.
I’ve seen this same economic horror show back in 2001, 2008, 2010, 14,15,,16,17,18. Wonder why retail is dead? Todays, Kids spend all their allowance money on their cell phone payments, and have no money left to go shopping or even buy a car. This is the re-engineering of our society and habits to turn these young pumpkins into worthless twits. Drug them with fluoride and hormone chemicals in the drinking water, all to kill their life ambitions, and kill their sperm and eggs with microwave WiFi signal bombardment. And these young poor bassturds can’t even throw a hand grenade to pass Army requirements for basic training. WTF?
Then we have monster Amazon that makes the US Post office lose about $1.50 a package that they send out below cost of retailers. Great wink wink deal. Its fascism and special favors that are killing the regular folks and small town businesses. SUPPORT YOUR LOCAL RETAIL ESTABLISHMENTS, AVOID BIG BOX STORES IF POSSIBLE. GO TO A LOCAL HARDWARE STORE INSTEAD OF HOME DEPOT. GO EAT AT A MONS DINER INSTEAD OF A WENDY’S RESTAURANNT WHICH SUCKS MONEY OUT OF YOUR LOCAL ECONOMY. EVERY WAY YOU CAN KEEP YOUR MONEY CIRCULATING AROUND THE LOCAL ECONOMY WILL HELP YOUR COMMUNITY. AND THE MORE TIMES THE MONEY EXCHANGES HANDS WHILE IT IS THERE, THE BETTER YOUR ECONOMY.
I think the brick and mortar stores are a thing of the past. We all know that a good portion of the price of the product is due to rent, inventory, and labor. I used to be a Costco member, but the only Costco available is over 50 miles away. I don’t go there anymore.
Because of my location, I spend a lot of money at Amazon. I look at Walmart, but they tend to steer me to their stores which I hate to go to and they want too much for shipping.
I can find out virtually everything I want to know about a product and I can think about it for however long I want before ordering it.
Furniture is the one store that will probably continue on. Although if the bastards would ship direct to me I’d never go into one again. I built most my furnishings, but I have never made a recliner yet.
Rellik, agreed that brick and mortar is dying. But I’ll still go to certain ones all I can as long as they stay in business. I go to local sources all I can. I do as little online shopping as possible but it looks like my options are changing.
I live near a mall in Illinois. Cook County. The Carson’s is closing (sold). Sears is cutting the size of their store in half. The Mall is where most of he crime in our town takes place. My buddy has a fast food biz in the food court. Rent? Was $8500 per month. You have to sell a lot of sandwiches to make that up. They lowered the rent some because business is still down about 25% since the last recession. I figure the next downturn will wipe out the mall here. The sales tax revenue is what pays for a lot of the police and fire budget.
Having owned a retail store people fail to grasp what is going on. The want to blame it all on the internet.
The main factor that is killing retail is the taxation from local communities. Government sees retail as a cash cow to tax higher and higher. Many communities are desperate to pay pensions. They would rather kill retail with taxes than admit they are wrong (never will happen).
The second factor is demographics. The baby boom generation caused to boom. When these people retire they neither have the money or need to spend on retail. Many baby boomers who shopped when junior was in high school are busy trying to pay the college bill. Times have changed.
The third factor is Chinese junk. It is difficult to find retail items with a decent margin that are not Chinese junk. And these do not fit well into a high $$$ retail environment.
The last factor is the drive for $15 dollars an hour. It is next to impossible to find a store clerk who will work for less than $20 an hour. Their argument is “…if Mickey D’s pays $15 than I deserve $22.50 and hour….”
And now you know why I no longer am in retail…
You say internet is not a big factor yet there is no sales tax on internet sales, Amazon gets massive tax breaks that other retailers don’t get, Amazon gets massive discounts on shipping from UPS and USPS that other retailers don’t get.
Amazon ships an order containing 4 items for a price that is most of the time close to what a regular store pays for them and then will ship those items in 2 sometime 3 seperate shipments with free shipping. Not even Walmart can do that. Once the brick and morter shops are gone amazon will jack their prices but the brick and morters will not have the capitol to start up again.
Him, if there’s any way possible you might want to relocate from the Chicago area.
I know. I’ve been looking at rentals in the next county, DuPage. Section 8 all over the place. Poor Hispanics mostly. Morris, Il. maybe. What do you think Sarge? Morris ok?
Have you seen the data for Pensions in Ill? Looks to me as if anywhere in the State is a bad idea. Taxes are going to go wild just before they crack up. I’d consider just out of the State if you can
Paranoid, Illinois has a 10% sales tax in Cook County. They just doubled the state income tax and state corporate tax. 80% of that increase went to state pensions. Didn’t put much of a dent in the unfunded balance. They keep trying to put extra taxes on whatever they can. We have an extra 5 cent tax per bullet. On top of the sales tax. An extra $25 per firearm purchase, on top of the sales tax. They had a sugar tax on pop, but the stores complained so much it was repealed.
As the man said: “You got to know when to hold em, know when to fold them, know when to walk away, know when to run”. I’d say it’s time to run.
Where is MRS. O’learies cow when you need her?
I hope Dicks follows them.
Dick’s sporting goods is done, they fell for the idiotic idea it’s the guns fault also they were the 1st ones to jack the eprice of ammo when it was scarce. I remember after the Columbine shooting, K-mart fell for the it’s our fault scam delivered by michael moore and they stopped selling ammo and guns. K-mart has been in a downward spiral ever since.
Sarge, I agree wholeheartedly about Dicks. They were only a backup source for ammo and gun-cleaning supplies for me but not anymore. Bass Pro is still my primary source and they’re much better to deal with.
We had a Sports Authority here for a while,
I stocked up. I wiped out their ammo shelves.
I even followed them out to the TEU to get it.
The stores are gone now.
I normally use Midway or J&G for other ammo needs. My problem is always shipping.
Many companies will not ship gun stuff here as they think all
gun stuff is illegal here, or they have some corporate policy.
I’d be moving out of Illinois altogether. The financial picture for citizens of that state is increasingly grim:
Collapse of Harvey’s finances signals what’s ahead elsewhere in Illinois
“The unfolding fiscal crisis in south suburban Harvey should send shivers down the spines of public employees and retirees across Illinois.
It also should give pause to taxpayers, who already pay the highest combined local and state taxes in the country and who continually are being forced to pay more because of unsustainable public pension benefits and a culpable state government that refuses to do anything about them.
Last fall, Illinois’ First District Appellate Court ordered the city of Harvey to raise its property taxes specifically to pay for its Firefighters’ Pension Fund, which has just 22 percent of the assets it needs to meet all of its obligations to current and future retirees.
Enforcing a 2010 state law, Comptroller Susana Mendoza in February began garnishing the city’s tax revenue to make up for similarly large shortfalls in its police pension fund. An appellate court has since stayed that action, but Harvey laid off 40 police and fire department employees last week as a result of losing about $1.5 million in tax revenue.
Located near the Indiana border, Harvey is home to a shrinking population of fewer than 25,000 residents – 38 percent of whom live in poverty, according to 2016 U.S. Census estimates. In 1990, its population was closer to 30,000 residents.
The median income in Harvey, in 2016 dollars, was $21,909. The median home value was $72,700.
Harvey has had high crimes rates for decades, yet 13 patrol officers were among those let go in last week’s purge.
In short, Harvey is a community on the brink of financial collapse. And its residents are the ones who will pay for it.
“They have no assets left to sell. They can’t raise money anymore,” said Ted Dabrowski, president of Wirepoints.com, a government and financial watchdog. “The community is effectively bankrupt, if not legally bankrupt. When the money was taken away from them to fund pensions, they had little money left” to fund operations.
Dabrowski and others – both inside and outside of Harvey – agree that the city has been mismanaged for years. But its staggering pension obligations have accelerated its decline to the point where legal bankruptcy could be its only remaining option.
Yet the state of Illinois doesn’t allow municipalities to declare bankruptcy. Even as Illinois cities such as Harvey and others continue their respective free falls toward insolvency, state law prevents them from doing much of anything but cutting staff and raising taxes – even when it is obvious that taxpayers have little or nothing left to give.
It’s a viscous cycle that is nearing its breaking point in Harvey.
“They don’t control collective bargaining, the state controls that now,” said Dabrowski, who has been studying Illinois’ pension crisis for the past decade. “The state won’t let cities change their pension benefits [because of the no diminishment clause in the constitution.] But at the same time they won’t allow for them to file for bankruptcy.
“A place like Harvey really has nothing left to do,” Dabrowski said.
The reality is Harvey might be only the tip of the iceberg. A growing number of Illinois cities and villages are approaching Harvey’s dire situation.
More than half of Illinois’ 651 municipal public safety funds are funded at rates below 60 percent, Dabrowski pointed out in a recent blog post.
“Harvey may be the first city to suffer garnishment, but it won’t be the last,” he wrote this week. “Illinois has a $10 billion downstate pension crisis – made up of municipal police and firefighter pension funds – that is separate from the state’s own $130 billion crisis.”
Municipal pension funds in East St. Louis, Round Lake Park, Sauk Village, Lakemoor and East Alton – to name just a few – are facing similar state action.
It’s a crisis that’s been decades in the making, and state government responds by doing what, exactly?
“Lawmakers are doing nothing to solve the problem, and they should be shamed,” Dabrowski said. “I think that’s the No. 1 message. They should be shamed.”
Dabrowski recommended four specific reforms that could help municipalities turn things around.
First, end defined benefit pensions for new employees and move them to 401(k)-style plans used in the private sector.
Second, amend the constitution to remove the no-diminishment clause.
Third, give collective bargaining power back to local governments.
“The state gives teachers the power to strike,” Dabrowski said. “Police and firefighters are allowed to go to binding arbitration whenever they don’t like [a contract offer.] The cities don’t control their futures. We have some of the most punitive collective bargaining laws in the nation by far.”
Finally, cities need to be able to file for bankruptcy so they can refinance their debt.
“Yes, it might mean that creditors take a haircut,” he said. “And it might mean some pensioners are impacted.”
But it’s better than the alternative – entire pension systems collapsing and public employees and retirees losing all of their benefits.
How many more Illinois cities are going to have to fall before the General Assembly acts?”
What should happen is the Mayor and city council should quit. and no one run for those offices. then the problem would shift to the state government. Why hold a public office just to be a whipping boy?
Imagine owning a house in Harvey, Illinois. How would you ever sell it, except at a MAJOR loss?
As long as Amazon is around,retail stores will go under. You either join the new wave or die. You have to compete or you shrink. Some one will figure out Amazon and beat them at their game eventually. Also, a lot of internet sales aren’t taxed. The Feds will take care of that. They are always looking for income sources.
Under my states law,
I’m required to pay sales tax
on any on-line purchase.
Not only does everybody ignore the law,
there is no way to pay the tax to the state!
They never funded or defined a way to comply
with the law!
Typical Democrat idiots. Outlaw everything.
see if we can stick something on you.
In NC, you have to calculate online sales tax as a percentage of your taxable income, unless you want to itemize and use a lower figure.
Luckily, I don’t have any NC taxable income, as they don’t tax social security or state pensions if you were vested years ago. The calculations on the tax form are such that I could actually work a good bit and still have a negative taxable income because of the standard deduction.
Federal income tax is way too much.
Amazon and Bezo’s is your death and the death of America.
Smaller stores can’t compete, they could if they got the same shipping rates as Amazon but USPS and UPS make up what they lose on Amazon with higher rates for everyone else.
I live in the Oregon coast range. We are very rural even though we are only 45 miles or so from everybody’s favorite town, Portland. I ordered a 100lb in the box engine run stand Monday evening from a big retailer in the midwest. It was leaning against the gate at the end of our driveway today at 1 pm. Less than 48 hours. I find that amazing.
BTW- Ketchup on demand, I saw on Zero Hedge that Puerto Rico had another island wide power outage. I hope you had replenished your generator fuel.
I prefer to see what I am buying before buying it. I really like to inspect it. I buy online the merchandise that I can’t get locally. Virtually all of my prepper stuff comes from online purchases. Of course, some of it I can find on sale but a lot of my gear has to come from online sellers.
Most of the malls are depressing to be in. They’re a sad reminder of former prosperity. Whenever the subject of the declining manufacturing sector came up in the past, the optimists would say “We are moving to a service economy”. What a load of nonsense! First, people started buying at the big box stores and now it is online! Now, Amazon is trying to automate its business as much as possible! Fewer jobs! So much for a service economy!
Meanwhile, farmers fear tariff war while steelworkers cheer. Thanks President Trump.
We are indeed a nation in decline. And every nation on the planet is in decline. And The actual reason is very simple. Too many parasite takers and too few producing makers. All those retail stores. They do not produce anything. The retailer the taxes are all parasitic. I attempt to buy directly from the manufacturer as much as possible. And shop online to cut out as many parasite middle men as possible. The best Is when we produce and process on our own without being robbed by some parasite taker.
Old guy, what do you produce? it’s obvious you have never run any kind of business. Calling retail stores takers is simply idiotic
Perhaps we just built too much. I mean, do we need Walmart, K-Mart, and Target? Do we need Sears, Kohls, and JC Pennys?Do we need Walmarts every 2 miles? Do we need Home Depots AND Lowe’s every other 3-5 miles? How about either a CVS or Walgreen/Rite Aid on every corner?