CoStar Insights

Retail Store Closures: Apocalypse Or Repositioning?

by Kevin Cody | Jul 31, 2017

How much trouble is brick-and-mortar retail in? Last year, for the first time since the Great Recession, more than half of all public retailers reported negative year-over-year same-store sales growth. Gymboree, Payless, rue21, Wet Seal, American Apparel, Gander Mountain, RadioShack, and hhgregg are among the retailers that have filed for bankruptcy this year. As a result, store closures have been making headlines, with nearly 6,000 stores announced for closure in the first half of 2017. As shown in Exhibit 1, these closures account for over 70 million SF of retail space, levels that are reminiscent of 2008, when retailers acted according to “the big bath” theory and tried to push out all of the bad news at once. The growing presence of e-commerce and weak growth prospects facing some retailers in an overbuilt retail market are largely responsible for this steady drumbeat of store closure announcements. So which buildings should worry investors the most? 

Retail properties with high Location Quality Scores (LQS) are best positioned to hold up well in a period of uncertainty. Low LQS stores are being targeted for closure by major retailers. This year, Kmart, JCPenny, and Sears are the top three companies to announce the closure of retail space, combining to shutter an estimated 45 million SF. Exhibit 2 shows the LQS distribution for announced store closures where an address was released. The CoStar Portfolio Strategy-defined weakest bucket (LQS scores 0–50) accounts for 65% of those store closures, while the strongest bucket (90–100) only represents 6%. As may be expected, Kmart’s and JCPenny’s remaining open stores have a much higher LQS than do the stores that these firms plan to close. The stores Kmart will be closing have an average LQS of 39, compared to 65 for its remaining stores. JCPenney’s closing stores average just 37, compared to 62 for remaining stores. Sears, meanwhile, is closing stores with an average LQS of 67, which is actually slightly higher than its remaining stores, which average 64. This reflects the fact that Sears often owns its locations and is closing some of its stronger locations in an attempt to raise cash. 

As the data shows, buildings with high LQS can still be affected by store closures, though at a much lower rate. These higher-quality locations have also demonstrated a higher probability of re-leasing space to quality tenants. As the store closure announcements translate into actual closures, the occupancy premium between top- and bottom-ranked assets could widen from its current spread of 200 basis points, making individual location quality an even more important characteristic for retail investors to consider. 


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