Tuesday, November 22, 2016

Is The End Getting Closer for the Little Guy?

For many years we have published the KeyPoint Reports, macro-level compilations of retail real estate trends and analysis in the three New England regions that we cover in our GRIID™ database: Eastern Massachusetts, Southern New Hampshire, and Greater Hartford, CT. One area on which we focus in these reports is the change in inventory and vacancy rate by store size classification - without question the most salient finding during the past decade was the impact on small stores less than 2,500 square feet.

Let’s focus on Eastern Massachusetts, the largest region we cover: since 2006 total retail inventory has increased from 176.5 million square feet to 194.2 million square feet, a 10% increase during the past 10-year period. At the same time we’ve seen a rise in the vacancy rate from 5.6% to 9.0%, with vacant space increasing an alarming 76% in the past ten years. The modest gain in total space and the dramatic rise in vacancy relative to prior decades can be attributed largely to 1.) the abrupt slowdown in new retail construction resulting from the Great Recession, and 2.) the mounting effect of online shopping on brick- and-mortar retailing.

No one has paid the price more than the small store owners. While modest growth has occurred in total inventory between 2006 and 2016, stores less than 2,500 square feet experienced a negligible decline of 1.0%. Of more concern, however, is that during the same time frame, vacant space in that size category increased from 2.5 million square feet to 5.7 million square feet, a whopping 124% upsurge, more than 1.5 times the rate of the entire region. The table below illustrates this change relative to the overall region:

For a while the vacancy trend had started to turn the corner. Similar to the region overall, the vacancy rate in this small store category began to decline from a high of 14.1% in 2010 to 12.4% in 2013. But that was as good as it got; since then, small store vacancy has increased each year and now stands at a new high of 14.7% in 2016. The rate could have been even higher were it not for some demolition and conversion to non-retail space among small stores.

While the direct impact from the recession has past, the retail industry continues to see a consumer shift away from brick-and-mortar to online spending. The just-released Forrester’s Holiday Retail Sales Forecast estimates that online sales will account for 13% of retail sales, up slightly from its 12% share of annual retail sales, while the best forecasts of overall holiday sales increases have been in the 3-4% range. Every quarter it is commonplace for national retailers to report sales gains in the low single-digit range, but then enthusiastically report e-commerce sales of double-digit gains. It should be no surprise, then, that for years now the industry in general has been budgeting fewer dollars toward physical store expansion while reallocating capex toward improving e-commerce platforms and enhancing the overall omnichannel retail experience.

But wait a minute: how does the little guy compete in the world of e-commerce? We’re talking about the independents, the mom-and-pop operators with no more than a couple of stores. How do these guys compete with Amazon? The vast majority can’t. But does that fact really have much impact on the retail real estate layout in the region? Within Eastern Massachusetts, our data indicates that there are more than 46,000 individual tenants. Surely the small-space category accounts for only a portion of that total. Well, you’d better take a seat when I tell you the next part: Are you ready? Approximately 22,600 tenants, or roughly one-half, are one- or two-store operators with stores under 2,500 square feet.

I wish I could tell you what is going to happen in the longer term to the little guys in the smaller stores. Let me just say that we should hope for the best and plan for the worst!
Bob Sheehan, Vice President of Research
BSheehan@KeyPoint Partners.com

KeyPoint Partners Company News

New Business: KeyPoint Partners has been awarded the management and leasing of University Mall in South Burlington, VT, the state’s largest enclosed mall, by the new owner. The mall management staff has joined KPP, and Vice President of Leasing Don Mace is handling leasing. KPP will also manage and lease Lorden Plaza in Milford, NH. New Leasing Assignment: Silver Sands Plaza, an 85,400 SF Stop & Shop-anchored shopping center on Bridgeport Avenue in Milford, CT. Sr. Associate Michael Branton is handling the assignment...New Employee: Andrea Suba joined the Plymouth, MA office as an Administrative Assistant.

Meet with us in New York: KSmith@KeyPointPartners.com

National News

Retail sales increased by 0.9% over September and grew 2.2% year-over-year, according to the National Retail Federation’s measure. The calculations excluded automobiles, gasoline stations and restaurants. The NRF said all sectors were strong except furniture, home furnishing and department stores. The Commerce Department said October sales rose 0.8%. Among retailers still reporting monthly same-store sales, L Brands was up 1.0%, Gap was down 1.0%, and Costco was up 2.0%. See our sales reports below.

Accelerating Retail News

Dick’s Sporting Goods won a bankruptcy auction with a $70 million bid this month to take over Golfsmith International’s US business. Dick’s will keep at approximately 30 Golfsmith stores open and shutter the rest with the help of liquidators Hilco Global and Tiger Capital Group. The auction is awaiting the approval of a US bankruptcy court judge...Spence Diamonds will open its first US store in Austin, TX next month, soon to be followed by stores in CA and AZ, with additional markets to be announced soon. Spence features “artisan created diamonds,” which are created in a plasma chamber instead of being dug out of the ground...PGA TOUR Superstore signed leases for three new stores in 2017. PGA TOUR recently acquired a Sports Authority location in Glendale, AZ, and is also planning new stores in Hilton Head, SC and Jacksonville, FL (later next year). This November, PGA TOUR will open a 45,500 s/f store in Woodland TX, its 27th store...Chipotle Mexican Grill opened its first Tasty Made burger restaurant in Lancaster, OH, last month...Modell’s Sporting Goods is opening a flagship store at a 2-level, 20,000 s/f former Sports Authority store in Manhattan this month...Online men’s clothier J.Hilburn is opening a showroom in Dallas’ Inwood Village shopping center. If it goes as planned, the company will open 10 to 15 showrooms over the next 5 years in major US cities...Amazon is planning more physical stores. There will be Amazon book stores, Amazon food stores, Amazon pop-up stores and maybe even Amazon fashion stores. Amazon is preparing a grocery store pilot program - by the end of 2018, 20 grocery units are slated to open in various US cities... Petco will celebrate the grand opening of 9 new stores nationwide in November and December, part of the company’s growth plan, which includes 63 new Petco stores and one new Unleashed by Petco store year-to-date... Saks Fifth Avenue has opened its 3rd store in Miami, a 107,550 s/f full-line store at Brickell City Centre; this is Saks 7th new store opening year-to-date... E-commerce apparel company Bonobos is seeking to expand its brick-and-mortar operations. Bonobos launched in 2007 predicated on the idea that men don’t enjoy shopping and that all menswear would eventually be sold online. Since then, the company has opened close to 30 “guideshops” nationwide. Bonobos has expanded its partnerships with other retailers, and has plans to open 100 stores of its own by 2020... Toys “R” Us has opened a new prototype in Santa Ana, CA. At 25,000 s/f, the store is smaller than the chain’s traditional stores. It also has more interactive features. 3 additional locations are planned... Regency Centers and Equity One have signed an agreement to merge. Regency will continue as the public company. The transaction, which was approved by the boards of both companies, will create a national portfolio of 429 properties totaling more than of 57 million s/f... PetSmart opened its 1,500th store, in Sheridan, CO, one of approximately 80 new stores the retailer is opening in 2016 in new markets as well as current markets.

Decelerating Retail News

American Apparel is preparing its second Chapter 11 bankruptcy filing in roughly a year. American Apparel, which emerged from bankruptcy as a private company in February, has brought in strategic advisory firm Berkeley Research Group to oversee its restructuring efforts. American Apparel hasn’t been able to get its feet on solid ground since its controversial split from founder Dov Charney, who was ousted by the board in 2014...Office Depot will close 300 stores over three years, including 65 locations to close in the fourth quarter. Office Depot closed 7 stores during the third quarter, and with the 4th quarter closings will bring the total to 125 stores by the end of this calendar year.. Macy’s Inc. has sold five stores to General Growth Properties for $46 million. 4 of the locations will be closed by spring 2017. Macy’s currently operates about 880 stores... Fossil Group is planning an overhaul of its business that includes closing some of its 284 US stores; the company did not announce how many stores will close... Ignite Restaurant Group closed 14 Joe’s Crab Shack restaurants and 1 Brick House Tavern + Tap unit in the 3rd quarter. Ignite has closed 17 Joes and the one Brick House already this year. Ignite has 138 restaurants, down from 154 at the end of the same quarter last year including 113 Joe’s and 25 Brick House units...Store closing sales have started at 59 US Golfsmith stores. Golfsmith gift cards and merchandise credits will be honored at all closing stores through November 11, 2016...Noodles & Company will consider closing some of its under-performing stores or converting company-owned restaurants to franchised properties. The chain closed 16 restaurants at the end of 2015. Noodles currently has locations in 35 states. The company will slow growth to 10 or 15 new restaurants in 2017 and will concentrate those new stores in more established markets... Hhgregg has exited the Wisconsin market, closing its five “under performing stores in the state... Kenneth Cole is closing its 63 outlet stores within the next six months. After the closings, the retailer will only have two-full priced stores left in the US - in New York and  Arlington, VA.

New England News

Harvard Square icon Cafe Algiers on Brattle St. is closing for good this month after 45 years in business. The two-floor cafe was known for its selection of coffee, tea and Middle Eastern delicacies...Boloco sold five of its 16 restaurants this month. Boloco co-founder and owner John Pepper sold the chain’s locations in Burlington, Concord, Natick, Wellesley, and near Northeastern University in Boston to burger chain b.good. The chain’s Hanover location will not be affected by the sale. b.good has 45 locations and plans to have 60 by March...Flour Bakery opened its 5th location at 114 Mount Auburn St. in Harvard Square. A 2nd Cambridge location is expected to open in December, with another Boston location, behind the Prudential Center, coming in January 2017...Bon-Ton Stores Inc. plans to close a department store in Hamden, CT, marking at least the 6th closing announcement by the retailer over the past two years. Bon-Ton said the CT store will shut down when its lease expires Jan. 31.... Under Armour debuted its 19,000 s/f, two-level Boston store at Prudential Center this month. This is the company’s largest flagship opening of the year... The Sears store in Corbin’s Corner, West Hartford, CT will close in January 2017. After Sears’ closing, the space will be developed for REI, along with additional junior box and small shop retailers and restaurants... The sale of The Shops at Somerset Square, Glastonbury, CT  to Rouse Properties for $42 million has been completed. The 114,106 s/f property is anchored by Ann Taylor, CafĂ© Max, MAXFISH, Starbucks, Talbots and Victoria’s Secret...Two retail properties in Beverly and Duxbury MA sold for over $8.9 million in total: Dodge Crossing located along Enon St. in Beverly, and Duxbury Marketplace on Depot St. Occupying 30,100 s/f of frontage along Enon St., Dodge Crossing is anchored by Sleepy’s with additional tenants Learning Express Toys, Mathnasium, Triad Driving Academy, and others. Duxbury Marketplace consists of 5 separate buildings on 3 acres in the middle of the retail area. Tenants include Coldwell Banker, Eastern Bank, Duxbury Dogs, and others.


Notes: figures gathered from individual company websites, press releases, and Federal filings.  Not all companies report all figures; results not reported will be marked “n/r”. Quarterly results will be updated when available; quarterly figures are shown in italics. Figures from companies not calculated to one decimal point automatically received an ending digit of 0. 


US retail sales rose more than expected in October as households bought motor vehicles and a range of other goods, pointing to sustained economic strength: retail sales increased 0.8% last month, the Commerce Department said.

Source: U.S. Department of Commerce - commerce.gov


Treasury Yield Sources:  federalreserve.gov; ustreas.gov


The Conference Board Consumer Confidence Index®, which had increased in September, declined in October. The Index now stands at 98.6 (1985=100), down from 103.5 in September. The Present Situation Index decreased from 127.9 to 120.6, while the Expectations Index declined from 87.2 last month to 83.9.

Source: The Conference Board - www.conference-board.org


Manufacturing expanded in October as the PMI® registered 51.9 percent, an increase of 0.4 percentage point from the September reading of 51.5 percent, indicating growth in manufacturing for the second consecutive month. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business - www.ism.ws