Retail Industry Remains Optimistic, With Low Vacancies and Rising Rents, Despite Troubled Economy

Article originally posted on CoStar on May 24, 2023

Blackstone Group, touted as the world’s largest real estate investor, remains bullish on retail property despite an uncertain economic outlook for the last half of the year.

Stephanie McGowan, a managing director at the private-equity firm, was asked if her company was delving into buying data center and industrial properties, real estate categories that have been performing well. The company is involved in those arenas, but retail is still a darling for Blackstone, according to McGowan.

“There’s certainly a lot of great growth in data centers and industrial,” she said this week at the 2023 ICSC conference in Las Vegas. “We’re seeing that and we’re playing into that theme. But we have definitely a conviction, enthusiasm, for retail. I think for us it blends a great certainty of cash flow, which we’ve seen has been super resilient through lots of cycles, through COVID, through online e-commerce … it’s proved resilient. And we’ve kind of woken up to that.”

There’s been a lot of headline-grabbing bad news about the retail industry in the past few months. The list of companies seeking Chapter 11 protection, and in some cases planning to liquidate, in 2023 keeps growing, with new members including Union, New Jersey-based Bed Bath & Beyond and Dallas-based Tuesday Morning. And a few more filings could be coming, some retail professionals said.

Interest rates are high and bank failures have put a squeeze on lending. Consumers are tapping into their savings, and struggling to afford necessities such as groceries, a category where prices have soared with the spike in inflation. And the economy could take a turn for the worse, moving into a recession, according to some economists.

But despite all those headwinds, officials at companies like Blackstone — as well as brick-and-mortar retailers and mall and shopping center landlords and operators — said they are optimistic about the industry this year, albeit some cautiously so. Because of the overbuild in prior years, developers have pulled back and there has been very little new retail space coming onto the market. So inventory is tight for that space, which is helping to drive up rents, according to several brokers and landlords.

Recently vacated space, such as former Bed Bath & Beyond sites, is being leased by a throng of fast-growing chains, like the dollar stores, off-price retailers such as TJX Cos., and digitally native brands that now deem it necessary to have brick-and-mortar locations, brokers said. On a macroeconomic level, U.S. unemployment remains low, inflation is tamping down, and consumer confidence and spending remain steady — all a boon to the retail industry, according to some brokers.

The positive data is all there to support an upbeat take on retail, according to Kristin Mueller, president of JLL’s retail property management business.

Leasing velocity is beating last year, which was a record year, vacancies are down, space supply is constrained, consumers are still spending so sales are up, and while the capital markets are constrained deals are still getting done, Mueller said. Money is available, but it’s just more expensive and it’s “a little trickier” to borrow, she said.

“Special servicers and bond holders don’t want all this real estate back, so they’re extending [loans], they’re working with borrowers. … In retail, we are not in a recession,” Mueller said. “I’m afraid we’re going to talk ourselves into a recession. But the fundamentals don’t indicate a recession.”

The number of U.S. store closings slated this year has risen dramatically compared with 2022, driven by the high-profile bankruptcies. As of May 19 this year, U.S. retailers have announced 4,051 store openings, far outpacing closings so far, which stand at 2,619, according to the latest data from Coresight Research.

But the number of stores being shuttered has soared compared with 2022. Year to date, major retailers have announced 6.7% more openings and 74.7% more closings compared to the same time last year, Coresight said. For the same period last year, there were 3,798 openings and only 1,499 closings, according to Coresight.

And UBS Group recently released some gloomy predictions about store closings, with an analysis that as many as 50,000 stores across the United States will close before 2027.

But a number of retail real estate brokers and other experts said they don’t view such closings as a bellwether of any impending disaster for the industry, but rather the age-old winnowing out of weak and troubled companies. For decades retailers have failed and liquidated, and the pandemic led to an astounding number of Chapter 11 filings as well as a record number of store closings.

The industry evolved in reaction to COVID, according to landlords and brokers. Those that pivoted, by bolstering their online capabilities, for example, survived and are stronger for it, according to some brokers. Some struggling retailers managed to hang on, but their judgment day has finally arrived, brokers said.

“The retail sector will continue to reinvent itself with the poor products-and-services operators falling flat and the new shiny object that consumers think they need will be the fad,” said Derek Anthony, senior vice president and managing director of brokerage for developer Woodmont Co.

Ami Ziff, managing director of national retail at Time Equities, which has 138 retail properties, is among those who is “cautiously optimistic” about the industry.

“This is my 16th year here at Time Equities, and in the 16 years I’ve been around here, we’re operating in a retail market that has the best fundamentals I’ve seen in the last 16 years, just basic supply and demand,” Ziff said. “There’s strong demand for retail space from nationals, regionals and local tenants, and there’s not a lot of new construction for the last five or 10 years because there were so many store closings, and there was a lot of press about retail in the U.S. being overstored per capita. So you’ve got not a lot of new deliveries, new construction, a lot of demand, and a defined restricted supply of space, so what’s that translated to in our portfolio is meaningful, significant growth, high occupancies and an ability to recycle space as it becomes available.’”

Ethan Chernofsky, senior vice president of marketing at analytics firm Placer.ai, said some people buy into the myth of what he called the “retail apocalypse narrative” because of Chapter 11 filings, high inflation and the stock market’s woes.

“We see it rearing its ugly head with what happened with Bed Bath & Beyond,” Chernofsky said. “A retailer did not evolve the way it needed to so everything is collapsing. Garbage.”

Chattanooga, Tennessee-based CBL Properties, a mall landlord and real estate investment trust, has racked up a good year so far at most of its properties, according to CEO Stephen Lebovitz.

“We expected some moderation this year in sales, which we’ve seen,” he told CoStar News at the conference. “But it’s honestly been better than we expected for the first part of the year. Traffic has continued to stay above sales from last year, which is still above 2019 levels. And even the bankruptcies we’ve seen have been benign. Bed Bath & Beyond is the biggest, but there’s strong demand for their locations. … We’ve seen this coming for awhile, it’s not a surprise, so we’ve been able to prepare.”

But CBL, which emerged from Chapter 11 in November 2021 after the height of the pandemic, has had several properties that have since gone into special servicing.

“We have a couple of malls that we basically have given back to the lender and those are in receivership. … We felt that the debt balance was so high that we couldn’t see down the road it making sense for us” to keep those malls, Lebovitz said. “They were going to require investment, so we just didn’t want to continue.”

The REIT refinanced or extended the loans on many of its other properties, striking a $300 million such deal last year at favorable interest rates, according to Lebovitz.

Even though the retail industry has performed well so far this year, there are headwinds ahead, according to some landlords and brokers. Inflation will continue to strain household incomes, making the second half of the year tough and challenging, according to Diane Wehrle, marketing and Insights Director at MRI Springboard, which studies customer behavior. She said she expects Americans to roll back spending until the holidays.

And there are other experts who foresee the same thing.

“Retailers have held up pretty well, but the economy is definitely slowing down,” said Neil Saunders, managing director of GlobalData. “Sales, volume growth are both weakening. It’s not a serous recession, but there’s definitely a slowdown materializing and will probably get a lot worse.”

Retailers are taking a variety of measures that will help them to face such an economic scenario, like cutting costs, automating certain functions in their supply chains, reducing inventory, and being more conservative about buying looking more carefully into profitability at individual stores, according to Saunders.

Barrie Scardina, executive managing director and head of retail services at Cushman & Wakefield, said she is “conservatively optimistic” in her outlook for retail.

“We continue to see vacancy hovering nationally below 6%,” Scardina said. “We continue to see rents holding strong nationally. We’re going to see more stores open than close. But we are definitely going to go through a time where the consumer pulls back. We are. Credit-card debt is rising and interest rates are rising and we’re going to see people make decisions.”

The retailers who will get squeezed in that kind of economic environment are chains that have catered to middle-income shoppers, like Macy’s or Kohl’s, according to Saunders and others. Discounters will enjoy a boost in business as consumers hunt for bargains, and higher-income shoppers will continue to buy at luxury chains, keeping that retail sector secure.

“The middle-of-the-road brands will suffer,” Anthony said. “For those that are living paycheck to paycheck, they will swim in the deep-discount stores to save costs. Hence these retailers will see great increases, and the Top 5% consumer-income earners don’t change their habits and will continue to support their tier one brands like Warby Parker, Lululemon, etc. The finer things in life will be even better for them.”