The 1950s saw the introduction of two innovations to the American scene – the supermarket, where people could buy just about everything they needed for day-to-day living under one roof in air-conditioned comfort and to the soothing sounds of Muzak, and the computer. Who could have guessed that the latter would, in just 50 years, threaten the existence of the other?
Well, actually the Philco-Ford Company just about got it right in a short film made in 1967 regarding people shopping from home and paying bills through something not unlike the internet. That bit of prescient futurism aside, the effect of the computer on human efficiency in work as well as living has been dramatic over the past thirty years, and it might just be the beginning. The Census Bureau estimates that retail e-commerce sales as a percent of total quarterly retail sales in the first quarter of 2017 reached 8.5 percent. That is more than double the estimated 3.5 percent of sales in the first quarter of 2007 a decade ago. Those sales may look like small potatoes, but their impact has already been felt in the retail world, and pace of growth appears to be steady or growing. By 2027, it is not unthinkable that online sales will reach 20 percent of total retail sales. What happens to the old fashioned “big box” store then?
Truthfully, the likelihood that anchor stores will cease to exist in the near future is about nil. However, online sales have definitely had a negative impact on brick & mortar retail over the past decade as people have become more comfortable shopping online, and online retailers have multiplied and improved. E-commerce does not need to completely replace brick & mortar retail spending to close stores – it only had to take just enough off the top to make them less economically viable.
Since 2008, Southern Nevada has had 82 large anchor stores vacate their premises, representing 4.3 million square feet of retail space, or approximately 16 percent of all the anchor space in the Valley. Over that same period, 56 of those stores have been back-filled, leaving 1.3 million square feet of anchor space still vacant. Normally, 3 million square feet of net absorption in anchor stores would sound pretty good, but when we consider who has vacated versus who has backfilled, things become a bit more complicated.
From right to left on this graph, we see the types of retailers that have vacated anchor space over the past decade. The biggest loser was traditional grocery stores, and truthfully that is owed as much to the invention of Wal-Mart as to the internet. E-commerce has only just started competing with grocery stores in a meaningful way. After the grocery stores came, the department and clothing stores, then electronics and office supply, pharmacies and convenience stores, furniture stores, home improvement, hobby and sports and even discount retail. Store vacations have been felt broadly through the retail landscape. More importantly, some categories of retail have had vacancies of space with no corresponding occupancies, namely department and clothing stores, electronics and office supply stores and pharmacy and convenience stores.
Moving from left to right, we see who has back-filled these empty stores. At the top of the list are discount retailers – dollars stores, thrift stores and swap meets primarily. Fitness centers and specialty grocers come next, then hobby and sports stores, which fortunately occupied more spaces than they vacated.
The point is that over the past decade, we have swapped traditional grocery stores and other mainstream retailers for discount stores, and the swap does not represent an apple for an apple. Really more like an apple for a prune. Discount retailers are likely to pay less rent, and have a different impact on the shopping centers they enter than the stores they replaced.
In fact, when we look at the vacancy rates of non-anchor space in shopping centers, we see an interesting pattern. Shopping centers that have suffered no vacant anchor space in the last decade had an average vacancy rate in their non-anchor component of 11.7 percent. Not a very low vacancy rate, perhaps, but this is the post-Great Recession world we are living in. Shopping centers that currently have vacant anchor space show 17.6 percent vacancy in their non-anchor component. This makes sense – the loss of an anchor means the loss of customer traffic. Clearly it is better not to lose an anchor store than to lose one.
It gets interesting, though, when we look at shopping centers that have lost an anchor over the last decade and then re-filled it. Those centers had an average vacancy rate in their non-anchor component of 21 percent – higher than in stores that currently have an empty anchor space. This suggests that, at least in some cases, retail centers that back-filled an empty traditional grocery store with a discount retailer actually hurt their center instead of helping it.
Moving forward, we can expect to see more anchor stores vacate their spaces – JC Pennies, Sears and K-Mart are prime candidates for more downsizing. Who will fill these spaces – and will these new retailers help or hurt the centers into which they move? As we chart the course for 21st century retail, these are things that landlords and their representatives need to think about.