Posted on Forbes.com | July 8, 2018
Written by Andria Chang

View Original Article Here

 

 

Toys “R” Us, which closed the last batch of its U.S. stores just over a week ago, has left behind not only nostalgia but also hundreds of empty stores across the country. Still, if you thought this paints a gloomy picture of brick-and-mortar retail, you’d be mistaken.

 

As much as consumers mourn the death of Toys “R” Us, their sad and sweet memories may soon be replaced by curiosity and even excitement over who’s moving into the bankrupt retailer’s old homes. Arts and crafts retailer Hobby Lobby, off-price chains Burlington Stores and T.J. Maxx, and Marshalls parent TJX are just some of the new tenants, the Wall Street Journal recently reported, citing Conor Flynn, CEO of Kimco Realty KIM +0% Corporation, which owns some of the vacated Toys “R” Us properties and is a major open-air shopping center developer. Other retailers including Big Lots and Scandinavian Designs have also bid on some Toys “R” Us locations in bankruptcy court, The WSJ reported.

 

Kimco’s Toys “R” Us locations “are already seeing significant demand from our list of growing retailers that are in search of high-quality locations,” Flynn said in Kimco’s Q1 earnings call in April. “In addition to the thriving categories of off-price, health and wellness, specialty grocer, home improvement, furniture, arts and crafts, and entertainment, we have started to see new demand coming from co-working facilities, hospitality groups and medical facilities.”

 

It’s not just those emptied Toys “R” Us locations that are getting new leasing interest. Kimco detailed in April that it has seen over 3,000 net new store openings this year from “trending and growing” retailers—from Sprouts Farmers Market, Planet Fitness and GoHealth urgent care to traditional retailers Dollar General, Dollar Tree and Sephora.

 

Who besides Toys “R” Us are those new tenants replacing? Sears and its discount chain Kmart, Macy’s and J.C. Penney, as well as bankrupt Bon-Ton department stores and Payless shoe shops.

 

The Significance of The Toys “R” Us Closings

Thanks mostly to Toys “R” Us, a total of 3.8 million square feet of space was vacated in Q2 in U.S. open-air neighborhood and community shopping centers, including strip malls and trending lifestyle centers, real estate research firm REIS said in a study released Tuesday.

 

That marked the first time since at least 2013 that open-air shopping centers, representing the bulk of U.S. retail real estate, saw more space vacated than occupied, REIS said, adding that Toys “R” Us’s closings impacted Q2 statistics more than any other retailer had in any quarter over the last nine years.

 

It also pushed the Q2 open-air retail space vacancy rate to 10.2%, the highest in more than three years, from 10% in Q1, said REIS, which studied 77 primary metro markets, from San Francisco and Seattle to Raleigh-Durham and Boston. Toys “R” Us said in March that it would shut its remaining 735 U.S. stores, mostly located in open-air shopping centers, after abandoning a plan to turn itself around.

 

In the enclosed regional mall space, REIS data showed the Q2 mall vacancy rate also inched up 0.2 of a percentage point from Q1, to 8.6%, the highest rate since Q4 2012. That’s not surprising either, considering the several store-closing announcements from specialty clothing retailers like J.Crew and Abercrombie & Fitch and department store anchor tenants including Lord & Taylor.

 

Year-to-date, U.S. stores closings have totaled more than 4,100, more than double the 2,000 openings, according to a Coresight Research study released on Friday.

 

“The retail real estate space is at a crossroads right now,” REIS’s economic analyst Cody Bond told me.

 

Making Over Brick-and-Mortar Retail

But there’s hope after the crossroads.

 

Yes, the U.S. is still over-stored: A 2017 Cowen study found that the per capita shopping center square footage that American consumers get is at least four times more than that of their U.K. and French counterparts. Traditional brick-and-mortar retailers, fast expanding their own e-commerce operations, are still cracking the code on how best to capitalize on their physical locations and give shoppers a compelling reason to visit stores over shopping on Amazon.

 

However, those dynamics and downbeat headlines don’t translate to any dismal retail apocalypse scenarios. Changing consumer behavior has simply given the traditional brick-and-mortar retailers and shopping-center developers a big wake-up call and forced them to reinvent and answer the new fancies of consumers.

 

The fact that Amazon.com AMZN +0.89%, the biggest industry disruptor, is building a bigger physical footprint with the purchase of Whole Foods and the opening of Amazon Go checkout-free stores is just one supporting piece of evidence of the importance of physical retail. Also look at the parade of other online-born brands, including Warby Parker, Casper and Allbirds, that have moved to embrace store openings. On the traditional retail front, industry giant WalmartWMT +1.36% has enticed online shoppers with a discount when they choose to pick up orders at stores.

 

The average rent for both open-air shopping centers and enclosed malls in the U.S. has actually been rising, according to REIS. While the research firm doesn’t expect the industry vacancy rate to improve in the near future, it doesn’t expect any major uptick, either.

 

High-end and luxury retail locations “have continued to post very healthy rent growth despite the headwinds facing the sector as a whole,” REIS’s Bond said.

 

Labor market trends also lend support to physical retail. REIS said that less than one fifth of the 125,100 jobs the U.S. retail sector added over the last 12 months came from e-commerce. “The retail industries using traditional retail space are still showing net gains in employment,” REIS said. Meanwhile, restaurants, a growing marquee feature in shopping centers, have added 216,200 jobs the past year, according to REIS data.

 

Fashion Is Getting Less Sexy

As mall developers re-adapt to meet the new consumer demand, their tenant mix has also changed.

 

For instance, at the end of last year, mall developer GGP, which has agreed to sell itself to Brookfield Property Partners, counted 40% of its leasing tenant mix from apparel retailers, down from about 50% traditionally, GGP CEO Sandeep Mathrani said in a call in February. He added that that percentage could decline to as low as 35% this year. Food, entertainment and big-box categories represented another quarter of its 2017 leasing activity, while other categories, including beauty, home furnishings, electronics and jewelry, made up the rest, Mathrani said. GGP owns properties including Las Vegas’s Fashion Show mall and Chicago’s Water Tower Place.

 

“Our appetite for re-tenanting unproductive anchor space is big,” he said, adding that GGP has spent nearly $3 billion since 2011 to redevelop its properties.

 

One fruit of that labor—New York’s Staten Island Mall, opened in April—features such new tenants or relocations as Zara, Dave & Buster’s, Shake Shack, Chipotle, Ulta Beauty and AMC Movie Theater. Hip European fast-fashion chain Primark, which on Saturday opened its ninth U.S. store since entering the U.S. in 2015, also became a new tenant.

 

Simon Property, the biggest U.S. mall developer and the owner of the King of Prussia mall in Pennsylvania, said in May that it’s investing more than $4 billion to create “experiential destinations of the future” across its multiple properties.

 

Take the Phipps Plaza in Atlanta’s Buckhead area. Simon is outfitting it with key features including a Life Time fitness center, an office building, an AMC 14 theater, an AC Hotels by Marriott and a residential building alongside 100-plus brands, the company said.

 

As for those brands, Simon said it’s seeing “a significant influx” of previously pure-play online retailers like Casper, apparel labels UNTUCKit, Walmart-owned Bonobos, and jewelry retailer Blue Nile. Fitness and beauty brands such as Peloton and Drybar are also moving into malls, which Simon said is giving customers a reason to visit and cross-shop other retailers at a faster pace than it’s ever seen before.

 

“The world of retail is ever changing,” chairman and CEO David Simon said in May. “We focus on what’s new, now and next.”

 

Brick-and-mortar retail is far from dead. It’s just morphing into a new look.