Mid-Year Review of the Retail Apocalypse – Keeps Coming Like a Waterfall

The Great Recession

For a year and a half I’ve been writing about the retail apocalypse that is going to add to US financial woes. This is not a problem created by economic collapse but a problem that I have said will greatly contribute to economic collapse and that is so massive and widespread that it assures some level of economic decline all on its own. As everyone knows, the problem is largely created by a change in shopping paradigms (mostly due to Amazon) that is shuttering brick and mortar stores as people shop online. 

I generally avoid malls, but I had to do some mall shopping the other day, so I used the occasion to survey the condition of our local mall to see how the retail apocalypse was developing in my own hometown where the economy is vigorous. In my estimation, 10% of the shop spaces in the mall were boarded up. That may not sound like a terrible situation, but if you compare the mall to a town, any town that has 10% of its buildings shuttered is in serious economic recession. The town is literally decimated at that number. Imagine walking Main Street of a town you’ve never been in and every tenth store front is covered in plywood. You get a pretty strong impression that things are not going well in that region.

The news I read today confirmed that my local experience represents the national scene well. Retail vacancy rates top 10% in many cities — not just vacancy in malls but throughout the whole city!

The amount of occupied retail real estate in 77 major U.S. metropolitan areas dropped by 3.8 million square feet (350,000 square meters) in the second quarter, the largest decline since 2009, according to a report by researcher Reis Inc. released Monday. (NewsMax)

I’m not saying 10% of the city is vacated; but 10% of its available retail space is vacated. That’s still a lot, given that we are, at best, at the midpoint of the retail apocalypse that I’ve been forecasting (along with many others).

The closure of all 800 Toys ‘R’ Us stores has done more to worsen the last quarter’s retail closure rate than any other retailer in any other quarter in almost a decade. The Toys ‘R’ Us collapse has joined many other retailers like Walmart, Penney’s and Sears that are closing stores. Sears just announced ten additional store closures to its list. It will be closing 78 stores in September. Sears has already closed over 500 stores in fifteen months. It has 900 stores that remain open.

Malls, similar to cities, are at a national vacancy rate of 8.6%, which is the highest number of mall shop vacancies since the end of the Great Recession. The Wall Street Journalreports that customers are also staying away from malls at a level not seen since the Great Recession. Shopping centers are running a little higher for closures at 10.2%.

So far, 2018 looks like it could beat the record that was set last year for the number of store closures in a single year if the second half continues to grow with new announcements at the rate it has been growing. Some reports say that more than 12,000 stores are expected to close this year versus last year’s 9,000, and the number slated for closure keeps growing. (Witness Sears’ new additions to their list.)

Now, think of what a full-blown trade war — just developing — might do to exacerbate that problem. Higher prices on imports can only mean fewer shoppers and probably more personal financial pressure to shop for better prices online.

In spite of all of this, retail sales, excluding autos and fuel, were up in the first half of the year, but it’s important to note that the strength as almost all in online sales and in home-improvement and appliance stores due to all the hurricane and wildfire rebuilding.

On a positive note for shoppers, more liquidation sales are beginning in July!

United Kingdom Klosures

The problem is the same in the UK where High Streets (the Main Street in town where retail is concentrated) are seeing decline.  Several major retailers are slashing store sizes, and others are entering “administration,” a.k.a bankruptcy. The House of Fraser, a department store group established in Scotland in 1849, is shutting thirty stores (almost half of its total) and terminating 6,000 employees.

Already more than 1,300 stores have been closed in the UK this year. Some of the London centres are elegant places with high marble walls and rich wood trim, which are becoming empty hallways that may soon covered in plywood. If new kinds of tenants aren’t found in a couple of years, they may take on the dystopian look of retired subway stations because real estate deteriorates quickly when no one occupies it or maintains it because there is no income to allow maintaining it.

Given that high streets have historically been the heart of any UK town or city, there appears to be a fundamental need for businesses and local councils to adapt to the radical changes affecting the retail sector to preserve their high streets’ vitality and financial viability. (Phys.org)

A lot of adaptation will have to happen quickly to keep town centres from looking like ghost towns.

On the other hand, some say retail horror stories for the UK are overblown:

The [Local Data Company] found that the overall vacancy rate last year rose for the first time since it started measuring it. But this was only a marginal 0.2% rise, giving an annual rate of 11.2% – the same as in 2016…. “This increase in vacancy is perhaps more marginal than might have been expected given some of the current rhetoric.” (BBC)

Similar problems are being seen in other nations, such as Canada.

The downstream effect

The big, big problem with this whole scene is the knock-on effect. So closure of so many stores creates less draw for customers at malls and shopping centers. This cascades into the closure of stores that were doing perfectly fine … as well as restaurants that drew traffic from all the surrounding stores. It can further tumble down to fueling stations and bank branches that are no longer warranted because they were located due to foot and auto traffic that is no longer there.

For example, the otherwise highly successful Starbucks has announced closure of hundreds of coffee stores due to diminishing traffic in the areas where those stores are located — traffic that is not diminishing due to any flaw with Starbucks or even due to a declining interest in Starbucks. Starbucks in the UK has announced it will close all of its 379 Teavana stores because they are mostly located in malls or other areas with diminishing traffic. Starbucks is not a draw so much as a place people stop by conveniently for a beverage and treat when they are drawn to an area for other reasons. If you don’t like Starbucks, consider that the retail apocalypse is effecting your favorite coffee or tea dealer to the same degree — even the mom-and-pops.

There is even a knock-on effect to the major companies that have already announced closures, such as Sears with its 900 remaining stores. As their competitors shut down in locations where their stores were doing well, some of Sears profitable stores start to struggle for lack of traffic. And, so, they have to add to their list of closures even some of their better stores.

From 2010 to 2013 mall traffic dropped 50%. Now it’s moving that way again with one big difference. Then it was the tail end of the Great Recession still continuing to create problems. That was (kind of) temporary in that it was due to a recession that was not caused by retail. It was the result of a problem, not a problem in and of itself. Now it is a paradigm shift in shopping, so the downturn is likely to be permanent.

What we are seeing is only the mid-point of the first phase of store closures (stores that were doing poorly), which was planed for a 2-3-year period a couple of years ago. The second phase comes when stores that were once doing well begin to shut down because of the first round of closures. The biggest unknown is how far the cascade goes from there.

Someplace in the midst of all that, retail real-estate owners start declaring bankruptcy, and banks start to feel pressure. This isn’t being caused by economic problems, and it will not by itself take the whole economy down nor likely take major banks down; but this shift to online shopping is a titanic weight that will certainly add to economic problems that are developing on other fronts.

There is another trailing effect to all of this, too, which is the effect it has on other commercial real estate prices. As malls experience dire problems due to retail closures, they start competing with their space for other kinds of tenants, creating a growing supply of office or warehouse space (and therefore likely shrinking prices in those markets)  as dead malls reposition their marketing and use of their physical assets.

Finally, there is the lasting effect this collapse has on local governments that see sales-tax and property-tax and business-tax revenues shrink. They will seek to make up those revenues in other ways, such as perhaps higher tax rates on residential real estate. Those tax changes and real estate oversupply problems can even bring to a halt urban renewal projects that had been looking successful.

While, so far, overall employment levels in the US have not been taken down by retail closures, 66,500 retail jobs were lost in 2017 and who knows how many jobs in companies servicing these retail businesses. For now, the economy has swallowed up the employment dent.

By 2022, it is expected that one in five malls in America will have closed up entirely. Dead malls either get left derelict due to protracted legal battles or lack of interest in the space or get scooped up in foreclosure sales and then converted to other uses. That means the demographics around them also change. Green Street Advisors estimates a higher number — that a third of shopping malls will close down.

The visual and demographic changes around these malls could be severe, impacting the value of surrounding residential real estate as well.

Imagine, for example, that the shopping mall that once brought people to rent apartments nearby because they are people who love to shop now becomes a collective of warehouses where shipping trucks run night and day — perhaps an Amazon shipping center! It becomes noisier with beeping forklifts all day and night and truck tailgates opening and slamming shut, and it employs fewer people because Amazon uses a lot of robots. People-watching becomes a dead activity. The place that nearby dwellers went down to for ice-cream in the afternoon as well as the restaurants they went to in the late evening are long-since shut. Now, all you can do is stand on a curb and watch freight roll in and out. What happens to residential rental values then?

Things usually do not turn out as dystopian as worst-case scenarios because we find ways to adapt In the long run, and we may be better off far down the road to have less vehicle traffic and less pollution; but adaptation is going to be a painful process that will take years to work out, not months.

Growing pains

Ironically, Amazon has begun opening brick-and-mortar stores, and its troubles are that it is having hard time — due in part to driver shortages that cannot fill its demand — delivering all the orders it gets. Its product sales are growing at an annual rate of 25%! UPS, FedEx, and the USPS are all straining to meet Amazon’s demands to where Amazon is now enticing entrepreneurs to step in and, with Amazon’s help, form their own delivery companies. So what is bad for brick-and-mortar retail is outstanding for delivery-truck drivers.

Beware, though, being totally dependent on Amazon, which could drop you as quickly as they take you on, could leave you with a lot of trucks to pay for and no customer. A one-customer business is a risky proposition, even though Amazon will help you set up shop with technology, training and sales volume as well as help with lowering your cost for acquiring trucks, fuel and uniforms. However, you’ll also have your own extreme labor shortage problems just as UPS and others do because the number-one area where labor supply does not meet demand appears to be CDL-rated truck drivers.

Hence, the big push now for driverless technology in big trucks; but knowledge of that push is keeping some people from moving into truck driving. They know that the career that is in demand today is slated to be one that is removed by robots along the way because of the demand. Since it costs about $3,000 to get your CDL endorsement, it’s an investment that some are leary of making in a world where that career risks becoming obsolete.

My guess, however, is that it will take a few years for the technology to become widely approved and more time than that for it to simply fill the unmet demand for drivers. By then, the more imminent economic collapse may mean we need a lot fewer drivers anyway.

I think many people do not grasp how much this transformation could change the way towns and cities look and operate. It is a transition from the Jurassic period of retail to the Cretaceous. New life forms will develop that might be quite pleasing, but a lot of dinosaur species will go extinct (and already are dying). With that said, sometimes countervailing forces emerge from the unseen and push back, causing the change to be less extreme than it originally appeared it would become.

The Great Recession