Here’s Why Vacant Stores, Zombie Malls Are Much Bigger than Mall Vacancy Rates Indicate


by Wolf Richter, Wolf Street:

Zombie malls and shuttered stores don’t count.

Another regional long-established department-store chain bites the dust. One in an endless series. The 16 Magic Mart stores in West Virginia, Virginia, and Kentucky, plus a distribution center and the company’s headquarters will be closed and liquidated, according to Ammar’s, Inc., a family-owned company that owns the stores and started with its first store 97 years ago.

In a letter to employees, the company blamed “continued inadequate sales leading to substantial financial losses,” and “difficult economic conditions that continue to persist in the markets we operate.” All locations will be closed “sometime around November 1.”

And then those stores, many of them located in less than booming environments, will become vacant.

Department stores have been hardest hit by online retail. Among them, regional chains have been hardest hit. Bon-Ton Stores – which operates department stores in 23 states under the brands of Bon-Ton, Bergner’s, Boston Store, Carson’s, Elder-Beerman, Herberger’s, and Younkers – is now in the process of being liquidated. 24,000 employees are losing their jobs. Numerous smaller chains have shut their doors. Among the national chains, store closures have been widespread: Macy’s, Sears, Kmart, J.C. Penney, etc. have closed thousands of large stores over the past few years. Smaller stores and specialty stores are shutting down across the country. And these stores become vacant.

Landlords have to find other tenants in this environment, or find another purpose, such as redeveloping them for use by chain restaurants, or bulldozing them and building office buildings or apartment buildings or whatever on the land.

Bon-Ton combined with Toys ‘R’ Us – which closed its remaining stores on Friday – occupied nearly 60 million square feet of retail space. Every square inch is now being vacated.

And there’s some handwringing about the so-called “vacancy rate” in the retail sector – a deceptively low measure for reasons that we’ll get to in a moment.

The retail vacancy rate rose to 8.6% in Q2, the highest since 2012, according to data from real-estate research firm Reis Inc., cited by MarketWatch. By comparison, the peak since the Financial Crisis was 9.4% in Q3 2011:

The impact is especially severe among strip malls and other neighborhood and community shopping centers, which suffered their worst quarter in nine years. About 3.8 million square feet of space was emptied from April to June, pushing the vacancy rate for this type of mall up to 10.2%, Reis said.

Note the magnitude: 3.8 million square feet were “emptied out.” This is tiny compared to the 60 million square feet emptied out by just Bon-Ton and Toys ‘R’ Us.

This is why the “vacancy” data, as unappetizing as they may be, aren’t in a steep swoon, though you’d expect them to be, given the rampant store closures.

But these numbers are deceptive – because something counts as “vacant” only when the landlord tries to fill it with another retailer.

Stores that emptied out and became zombie stores in zombie malls, or the Toys ‘R’ Us stores in bad areas with zero hopes of finding another retail tenant, etc. – they’re not being counted as “vacant” retail space because they’re no longer being marketed as retail space, and the square footage of that retail space disappears from the vacant retail space stats.

That space may remain shuttered and vacant for years, with a fence around that is catching tumbleweeds, as lenders tussle over who gets what, if anything, until the land can hopefully be sold to a developer who might bulldoze the walls and build an apartment complex on it.

For example, data provided by Transwestern, a national commercial real estate firm, showed that in 2017, total vacant retail space was 513 million square feet. And despite all the store closings, bankruptcies, and liquidations, the “vacant” space was down from any of the prior three years, and in total fell by 18.5% from 2014!

In other words, in the thick of the brick-and-mortar meltdown, so-called “vacant” retail space declines!

Transwestern divides this into two sectors: malls and shopping centers:

In malls alone, the epicenter of the brick-and-mortar meltdown, “vacant” space dropped 6.6% from 36.6 million square feet in 2014 to 34.2 million square feet in 2017! Ha, compare this to the 60 million square feet that Bon-Ton and Toys are vacating! And add to that the thousands of stores that Sears, Kmart, Macy’s, J.C. Penney’s, etc. have vacated. But not many of them show up in the “vacant” space stats though many remain vacant.

In shopping centers, which include strip malls, vacant space plunged 16% from 323.6 million in 2014 to just 272.4 million square feet in 2017. Ah yes, the boom in brick-and-mortar!

These types of figures are cited by industry soothsayers as examples of why the brick-and-mortar retail meltdown isn’t happening, and why the thousands of chain stores being closed every year aren’t having any impact on mall landlords – though mall landlords are scrambling to deal with the meltdown.

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