Landlord’s View of the Brick and Mortar Meltdown

by John McNellis, Wolf Street:

We are faced with weekly tenant bankruptcies, defaults, and requests for rent or space reductions.”

I received an invitation to attend a cocktail party in Los Angeles at next week’s International Council of Shopping Center (ICSC) meeting. In declining, I explained that we would not be attending the ICSC, our first absence in decades. Somewhat forlornly, our host replied he was hearing that a lot.

Why the shopping center industry’s premier West Coast event may go lightly attended is worth considering. One answer is simple: Pizzazz is in short supply at an event where the chalk talks will be about playing defense and even the biggest liars you ever met will admit to challenges facing their portfolios.

The writing may not be on the wall, but it’s sitting every afternoon on our front porch. A cardboard box waits outside almost daily. These boxes contain everything from hair products to prescriptions to pillows. While hard-put to tell a tweet from a text, the household’s reigning monarch can nevertheless shoot the e-commerce rapids blindfolded, ordering any item in a trice.

When the first few raindrops splash you after a long drought, you don’t necessarily think monsoon. When one package a month arrives at your door, and it’s a pair of shoes that are being returned the next day, you’re unlikely to worry about the future of traditional retail. But when that occasional delivery becomes a reliable year-round stream, it’s time to scope the bricks and mortar. If half a dozen friends confirm that they too receive a daily box, you might – if you’re a retail developer – begin to consider your business in a new light, possibly wondering what the ratio is between doorstep deliveries and skipped trips to your mall.

We have been in the retail development business for thirty-five years, developing a couple projects a year. Through more luck than strategy, we focused on smaller, supermarket-anchored, service-oriented neighborhood centers in towns with high barriers to entry.

That is, we just happened to pick the most internet-resistant strain of retail long before the net began its march to the sea. And because our best properties are in smug towns that encourage new development about as much as high school smoking, we have a bulwark against retail’s far greater problem, its staggering over-building from coast to coast. But even with this tight portfolio, we are faced with weekly tenant bankruptcies, defaults, and requests for rent or space reductions. In short, our retail is no fun.

Yet despite the Wall Street Journal’s almost daily pronouncements, traditional retail is not dead. But it is so badly overweight, so bloated with unwanted shopping centers, that it has Type 2 diabetes. America was choking from a vast oversupply of empty storefronts long before the internet and changing buying patterns rendered tens of millions of additional square footage redundant. But unlike most dieters, retail will ultimately – painfully – shed its excess weight.

How?

Retailers will do it the same way the savviest brick tenants are thriving today: by selling at the same price one can get anywhere on the net (never being undersold), by having great customer service, and by absorbing on-line ordering as an in-store service – you try on one shirt in the store, buy it, and then order five more on the spot from the retailer’s web site.

Having successfully executed this playbook, Best Buy’s stock is up 44% over the past year. This means of course that the next generation of brickers will be shrinking their store sizes, creating even more vacancies for landlords.  And many tenants will be unable to compete in this new razor-margined, twin-river world and will fall by the curbside, further jamming landlords.

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