By now, the headlines are familiar: Brick-and-mortar is dying, crushed by Amazon and the ever-growing popularity of online shopping. And the numbers appear to back this up, with more than 5,000 retail stores closing their doors in 2017. When Toys R Us filed for bankruptcy in late 2017, Bankruptcydata.com called it the third-largest retail bankruptcy of all time.
But despite this gloom, there is also hope in the physical retail world. IHL Group released a report, “Debunking the Retail Apocalypse,” showing that in 2017 U.S. retailers opened 1,326 more locations than they closed. The numbers look even better if you add in restaurant openings. With those added to the mix, U.S. retailers opened 4,080 new stores in 2017, with another 5,050 physical stores scheduled to open in 2018.
Why are some retailers, then, opening new locations while others are turning to bankruptcy protection? Midwest Real Estate News turned to Kelly Stohs, shareholder and co-chair of the national real estate litigation practice group in the Overland Park, Kansas, office of law firm Polsinelli, and David Vallas, shareholder and vice chair of the commercial litigation practice in the Chicago office of the same firm, for some insight.
Midwest Real Estate News: Why is there such a negative perception today concerning physical retail, even with the fact that so many retailers are opening new stores?
Kelly Stohs: There has been a significant volume of closures. There is no denying that. In the line of work that David and I are in, lease enforcement, we see that high volume of closures every day. At the same time, we see it more heavily in certain areas. We see it, for instance, in apparel. But we also see that in other areas, retailers are doing well and are opening new stores. There are some areas like discount retailers and restaurants that are doing quite well. You don’t really want to say that they are booming, but to some degree they are.
MREN: Why does the media seem to focus more on the closures than all of the physical retail openings we have seen in 2017?
David Vallas: A lot of the closures are household names, like Toys R Us. Sears is struggling. JCPenney is struggling. There are number of names that virtually everyone is familiar with that are struggling. When they are popular names, it tends to make headlines. It becomes a bit sensational. Throw in a buzz word like “apocalypse” on it, and it catches fire. But when you take a deeper look at all of it, it’s not that physical retail is going away. Instead, retailers are shifting.
MREN: How are retailers shifting? We’ve heard a lot about how retailers are offering experiences today as a way to compete with online sales. How important is this experiential retail?
Stohs: That is the focus right now. Retailers can drive more traffic with experience and entertainment. I don’t know that shopping center owners are sitting down and saying let’s completely change our model, but they are adapting so they can drive traffic. If apparel and accessory retailers are struggling, those spaces need to get filled with something that can attract consumers. If shopping centers have to compete with Amazon, they have to adapt. The shopping center won’t look the same in the future. Shopping centers will adapt.
MREN: What kind of experiential uses are you seeing shopping center management bring into their centers today?
Stohs: What we are hearing from our clients is that not only are shopping centers trying to turn themselves into a venue for entertainment, they are also trying to incorporate fitness centers and events. They are turning it into a place of community.
MREN: You recommend that shopping centers need to be both creative and cautious. Can you explain that a bit?
Vallas: There tends to be a knee-jerk reaction when you have a dark space to fill it as quickly as you can. But shopping centers have to be careful. Don’t put an office location in the dark space if it could violate the lease rules of three existing tenants. Then you are giving those other tenants another excuse to get out if they want to. You might create a domino effect.
Stohs: It’s about trying to strike a balance between their desire to fill dark spaces and their obligations. When a tenant vacates, shopping center management has a duty to mitigate the damages by finding a replacement tenant as quickly as possible. The key is to balance that by looking at the bottom line to determine how to make that space as profitable as possible. The ones that are thriving, they see mixed-use and creative uses are doing well today. That seems to be where the new model is going. Our caution is for management to be careful that those new uses don’t violate existing leases with tenants that are already in the center.
MREN: What is the danger of doing that?
Vallas: Putting in a use that violates the existing leases gives tenants another excuse to leave the center if they are haven looking for a way to end their leases. It also gives them an excuse to ask for a reduction in their rents. Either one of those outcomes is bad for the shopping center.