Commercial Real Estate: Is America Over-Retailed?
There are nine shopping malls per 1 million households in the United States according to report by UBS.
This count is up from eight per million in 1980. In 1980 retail stores did not have websites. So, despite the growth of online commerce, the amount of shopping malls has still grown. Over growth is when the department stores will begin to suffer.
Store closings are nothing new in fact the retail apocalypse has been happening since 2018 with 9,302 store closings in 2019.
The Impact of the Coronavirus on Retail
Stores have been forced to close in an effort to halt the spread of Covid-19 and as a result their sales have declined.
UBS has predicted there will be 100,000 stores permanently shut between now and the end of 2025.
However, on the other side of the spectrum online sales as a percentage of total retail sales in the U.S. are expected to grow to 25% from 15% over that same timeframe, according to a UBS analyst.
Commercial Real Estate: Retail Faces Many Hurdles
Facing Legal Hurdles: Co-Tenancy Clauses
The lack of sales is not the only problem for retailers. In fact, mall and shopping center owners around the country are getting ready to come face to face with a major legal hurdle: Co-tenancy clauses.
A co-tenancy clause in retail lease contracts allows tenants to reduce their rent if key tenants or a certain number of tenants leave the retail space.
A large or key tenant is a big draw for traffic, especially in malls, and is often one of the major reasons a tenant chooses to locate in a specific mall.
Co-tenancy clauses are especially built into leases of specialty tenants like an AT & T store or a Gap clothing store for example.
The verbiage of the clauses for example say something like: If less than 80% of space is occupied at this property at any given time, or if a major, anchor tenant like a department store or a grocery store goes dark here, the tenant is allowed a break in rent. Or the tenant is given the ability to terminate a lease early.
The clauses are meant to protect tenants when circumstances happen that are outside of their control.
As some of the larger department stores close for some retail store owners are pulling out their leases.
If a shopping mall starts to lose major anchors the other retailers will have the right to speak up.
Bottom-line the legacy of the coronavirus pandemic will be even fewer department stores in America.
“We’ve just got to figure out a way to be relevant. ... We don’t sell things people need, we sell things people want,” Pete Nordstrom, the retailer’s president and chief brand officer, said Friday during a virtual Vogue Global Conference.
Only time will tell who is left standing in a society for the time is turned to mainly essential needs.
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