Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter
Landlords are reading the memo, but it may be too late.
Shares of Amazon multiplied by a factor of ten since 2009. Shares of Wal-Mart are flat over the past five years but are up 30% since the beginning of 2016. Since mid-2015, shares of Best Buy are up 58%, Home Depot 28%, and Costco 10%. These and other retailers like them saw their share prices rise because they managed to navigate the new retail environment.
Many online retailers and online operations of brick-and-mortar retailers are thriving. Other retailers are thriving because, like Home Depot, they’re in a segment that is booming. So not all brick-and-mortar retailers are melting down. But many are, including the samples in the list below. The percentage denotes the crash in share prices over the past two years:
- Sears Holdings -65%
- Macy’s -68%
- Target -35%
- Bed Bath & Beyond -59%
- Hudson’s Bay (owns Saks and Lord & Taylor) -61%
- Nordstrom -39%
- American Eagle Outfitters -32%
- Tailored Brands (formerly Men’s Wearhouse) -81%
- Boot Barn -80%
- Christopher & Banks -68%
- Express -64%
- Urban Outfitters -47%
- Foot Locker -32%
And they’re the lucky ones among the brick-and-mortar meltdown lot; others have already filed for bankruptcy, and their shares have become worthless. Yet some of those on the list will likely join the bankruptcy filers over the next 12 months.
These are chain retailers that are household names. Independent retailers and small chains of just a few stores fight their daily battles away from the headlines. Unless you do business with them, you might never know. They face two extraordinary problems: the shift to online sales, where Amazon, Wal-Mart, and a few other giants rule; and spiking rents thanks to the Fed-induced asset bubble for commercial real estate.
This has become particularly clear in the most expensive cities, such as San Francisco or New York, with the result that a disturbingly large number of ground-floor retail locations are vacant, desperately waiting for new tenants, as documented by these haunting photos of shuttered stores, even on Madison Avenue.
In the 16 prime retail corridors in Manhattan, ground-floor vacancies surged from a year ago to 203 vacant stores, according to The Wall Street Journal, citing Cushman and Wakefield. Fifth Avenue between 42nd and 49th streets topped the list with a vacancy rate of 33%. On Fifth Avenue between 49th and 60th streets, where asking rent is $3,116 a square foot, the vacancy rate rose to 14.5%. A smallish 1,000-square-foot shop would have to pay $3.1 million a year in rent. That’s one heck of a big nut to have to jump over, with only 1,000 square feet of space.
There’s a simple fact: retail stores cannot make it when rents are too high, as margin and volume are already squeezed by online competitors. And landlords have started to read the memo. The Journal, citing CBRE Group, reported that overall asking rents fell 8.6% from the same period last year:
Asking rents for ground-floor spaces dropped in 11 of 16 prime Manhattan shopping corridors from a year ago, with some falling as much as 22% in stretches such as Spring St. and Broadway in the Flatiron District….
In SoHo, average asking rents on Broadway plunged by 16% in Q2 year-over-year to $667 a square foot, and on Spring Street by 22% to $828 a square foot. That’s still a lot of rent to pay. But cutting rents by these huge amounts is producing some results. The Journal:
SoHo had 13 retail lease deals, for almost 80,000 square feet of space, signed in the second quarter, ranking among the busiest Manhattan neighborhoods.
“Landlords have become more realistic,” Robert K. Futterman, CEO of retail real estate services firm RKF, told The Journal. “They are willing to contribute to tenants’ construction and make shorter-term leases or take a lower based rent just to get a 10-year lease.”
And some sort of hope is cropping up that slashing rents will produce broader results and stop the downward spiral. “A bunch of new tenants are sniffing around, coming into the market, primarily driven by price,” Patrick Smith, a VP at JLL, told The Journal. They include young entrepreneurs and local or regional retailers:
How low prices can go depends on the particular retail corridor and how specific properties have been financed, brokers said.
Some landlords who’ve owned the properties for a long time have more flexibility in lowering rents than landlords that bought at the peak of the market. They’re in a tough spot.
But if these new retailers with their big hopes cannot make the locations work, given the nightmare their business models are facing beyond rent, they’d once again give up, and rents would have to fall to ludicrously low and financially impossible levels to fill up the vacancies.
Plenty of locations would remain vacant, and landlords would bleed until the spaces are repurposed. For the hyper-inflated commercial real estate market, which has already begun to deflate, it will mean additional price pressures – and not just in Manhattan.
This is another real-economy effect of the Fed’s ruthless eight-year effort to inflate asset prices. At these prices, the already troubled real economy doesn’t work anymore.