Shopping Center Risk And Failure
The magnitude of retail casualties has yet to fully play out in the current cycle. Unemployment has been increasing so rapidly in the last twelve months that retail vacancy and the associated negative impacts have yet to “catch up” with the unemployment rate.
Shopping center risk can be identified by the evaluation of key operational and performance metrics. When thresholds are exceeded in these areas the potential for shopping center decline or failure increases dramatically.
The U.S. unemployment rate hit 9.7% in June while retail vacancy in strip centers is at 10% according to Reis. Vacancy rates are now at the highest since 1992. Unemployment is likely to push higher as retail vacancy is sure to follow. This will put more shopping centers at risk.
The point at which a shopping center is at risk for closure typically follows a pattern of loss in occupancy of anchors and small shops. Anchors are critically important because they drive the majority of traffic and sales to the center in most cases. Small shops are important because they are a key component of the center’s profitability. When occupancy drops below 70%, a shopping center has lost a significant portion of its critical mass and is moving in a direction that could result in catastrophic failure. The potential for failure is typically accompanied by other factors that result in continued decline. These are:
* Loss of one or more major anchors
* Weak or obsolete tenants (including anchors)
* Poor demographics (declining population and income)
* Declining sales trend amongst tenants
In regional malls the presence of Burlington Coat Factory or a vacant Steve & Barry’s has been a good indicator of the potential for further decline in the market position and income stream of a particular mall. The loss of one or more major anchor stores at a regional mall is also a good leading indicator that further decline is likely.
In power and community centers, the presence of vacancies caused by the loss of bankrupt tenants such as Circuit City, Mervyn’s, Linens N Things, etc., have the potential to spillover to other tenants due to the loss of sales and traffic at the center.
The regional mall universe consists of roughly 1,300 malls. At this point in time, 100-200 malls fall in the high risk category, however the at risk category is much larger due in part to the weakening of the department store industry. At least one-fourth of regional malls could be considered at moderate risk for decline and failure in the current cycle.
Outside the mall, the nature of the current contraction is such that at least 10% of retail space is at risk for failure. The closing of car dealerships is going to exacerbate this problem by bringing a substantial amount of additional commercial real estate to the marketplace. This will further reduce valuations and in some cases these dealerships will become legitimate alternatives to other retail locations, thereby reducing their marketability and value.
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