“You Can’t Get Your Haircut Online” | Retail Thrives Despite Rising Bankruptcies
Source: Wall Street Journal
Retail real estate has been a post-COVID darling, showing robust leasing and low vacancies. The adage "You can't get your haircut online," has seemed especially true as the consumer shifted their spending patterns to services. Even a wave of retail bankruptcies has not dampened the enthusiasm for retail real estate. According to the Wall Street Journal,[1] despite rising retailer bankruptcies in 2024, landlords are mostly unfazed due to near-record low retail availability, making it easier to replace departing tenants with more successful ones who pay higher rent and draw more customers.
Years of limited construction have contributed to the low vacancy rate of 4.1%. Retailers are opening more stores than they are closing this year, but the slowdown in store openings reflects the lack of available space rather than a lack of desire to expand. Retail construction has been at record-low levels since the onset of the pandemic, with only 9.5 million square feet of net new retail space completed in the first quarter of 2024, compared to over 80 million square feet in the first quarter of 2008[2].
Landlords are finding it much easier to replace failed retailers, with open-air shopping-center landlord Kite Realty Group (KRG) signing leases or negotiating to fill most of the nearly two-dozen former Bed Bath & Beyond stores in its portfolio. When Red Lobster filed for bankruptcy and announced it would break leases at 108 of its 550 locations, Kimco Realty (KIM), which owns one of those restaurants marked for closure, saw it as an opportunity. The firm is already fielding inquiries about the space located outside of Tampa, Fla., including from fast-food joint Raising Cane's, coffee chain Dutch Bros, and Fifth Third Bank.
Over the past five years, approximately 155 million square feet of mostly aging retail space has been demolished, according to JLL [3]. Supply is unlikely to increase soon, as building retail space is not economically viable given the high cost of land, construction, and labor. Rents would need to increase by nearly 35% to justify a wave of new supply.
Although there are areas of weakness, particularly in low-end enclosed malls, and concerns about slower consumer spending due to high interest rates and inflation, retail's strong recovery from the pandemic is a far cry from the years following the 2008-09 financial crisis. Landlords are now seeing retailer bankruptcies as opportunities rather than fears, as they can attract best-in-class retailers and push rents higher.
[1] Bankruptcies Have Left More Stores Vacant, but the Space Doesn’t Sit Empty for Long - WSJ
[2] Retail Supply and Demand Likely To Remain in Balance for Foreseeable Future (costar.com)