Retail Sector Thrives Despite Ongoing Retailer Bankruptcies

IRVINE, CA—The great retailer shakeup of 2016 continues, as recognizable brands such asSports Authority, Sports Chalet and Aeropostale have filed for Chapter 11. But despite these shutterings and others that have marred the last 18 months, the sector continues to be a very significant part of the economy. caught up with Donald MacLellan, senior managing partner with Faris Lee Investments, to get his thoughts on why certain retailers are closing and what owners and potential owners of multi-tenant centers should be thinking about
when it comes to this asset class. What are some of the major factors causing recent retailer bankruptcies?

Donald MacLellan: In my observation, there are a few main reasons why retailers fail to stay in business. First, a lot of them have lost their niche. This can be either from a pricing perspective – such as they are no longer discount or luxury – they are somewhere in-between; not providing the value consumers look for; or failing to provide the high quality and service that the more discriminating customer requires. In addition, these retailers are not responding to changing demographics. They are not only competing with online sales but they also have to compete with the more nimble boutique retailers focused on a specific niche.

Second, many retailers have recently gone private through leveraged buyouts which have burdened them with large debt obligations which tend to greatly restrict retailers from the ability to reinvest in their operations and/or change their market focus. How do the recent retailer bankruptcies impact retail property owners?

MacLellan: When a retail property owner has a tenant go dark due to a bankruptcy, it not only leaves a significant vacancy, it also has an impact on co-tenancy clauses. Oftentimes retailers in a big box or power center property have clauses in their leases that state if other retailers go dark, their rent can be reduced to a lower minimum rent or a fixed percentage rent.  There is also the potential for other retailers at the center to vacate early due to lower sales numbers. Ultimately, it can be very damaging for other retailers as well as the property owner. Quickly finding a new tenant to fill the space is crucial. What can retail owners do to protect their investment?

MacLellan: Owners need to be proactive, cognitive of trends in the marketplace, and diligent about who they select as tenants. We advise owners to select retailers that are meeting consumers’ daily needs and that are less vulnerable to internet competition. We also provide them with a market review of similar categories of competition in the local area and give guidance on what we think the long-term success will be. It is critical to understand where risk and exposure are in all parts of the ownership cycle.  It is also key to be proactive in positioning the center to local demands and the demographic profile. Any other final thoughts?

MacLellan: Smart owners, developers and investors are always taking a strategic look at their real estate. In the case of multi-tenant shopping centers, you can’t have a passive attitude toward your asset. It is always necessary to be very proactive and several steps ahead of the competition.

Ultimately, the recent bankruptcies should not be cause for concern from a retail property standpoint. Retailers come and go but the property sector is extremely strong and a large component of the economy.

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