Has the retail industry’s real estate bubble burst?

Photo: Getty Images
Mar 13, 2017
Tom Ryan

Richard Hayne, CEO of Urban Outfitters, believes the reason so many stores are closing is because retail is finally facing the consequences of its own real estate bubble.

“Our industry, not unlike the housing industry, saw too much square footage capacity added in the nineties and early 2000’s,” said Mr. Hayne last week on his company’s fourth-quarter conference call. “Thousands of new doors opened and rents soared. This created a bubble, and like housing, that bubble has now burst. We are seeing the results; doors shuttering and rents retreating.”

He added, “This trend will continue for the foreseeable future and may even accelerate.”

The bubble’s collapse, Mr. Hayne inferred, is being quickened by the massive shift to online sales that is only “partially replacing store shopping” and depressing store traffic. Flat to negative store same-store sales are causing occupancy deleveraging and eroding four-wall margins. With much of the real estate overcapacity occurring in apparel, the rampant discounting by retailers in the sector is eroding margins in Urban Outfitter’s core category.

As a result, Urban Outfitters is shifting focus to its “most promising opportunities” including its Free People wholesale brand and its digital properties. This year, Urban will complete the development of a single digital platform rollout to all brands to further its scale. The company is also planning to invest in better site functionality as well as data analytics to feed customer personalization.

The company will reduce its brick and mortar investments in North America, believing that its two largest concepts, Urban Outfitters and Anthropologie, having reached “full penetration.” Mr. Hayne also noted that it “makes little sense to enter into many new, long-term leases at this time when all signs indicate that a similar lease will be less expensive in the near future.”

DISCUSSION QUESTIONS: Is retail dealing with a bubble similar to the recent housing crisis? Is apparel facing greater over capacity challenges than other retail sectors? How do you advise retail chains to adjust their real estate strategies in light of the situation?

Please practice The RetailWire Golden Rule when submitting your comments.
"The nature of the stores that are needed has changed. It's now more about the right size stores in the right locations."
"The “bubble” — if it in fact is a bubble — has been about 50 years in the making."
"Perhaps the retail revolution needs to also move upstream to the mall owners."

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15 Comments on "Has the retail industry’s real estate bubble burst?"

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Chris Petersen, PhD.

The mantra in retail used to be location, location, location … it was all about prime real estate locations, especially for mega-stores and malls.

In the age of omnichannel there has been a tipping point in terms of retail real estate requirements. Stores are still important! But as click and collect grows, the nature of the stores that are needed has changed. It’s now more about the right size stores in the right locations.

The age of “build it and they will come” is rapidly fading for U.S. retail real estate. The new keys for location success are providing accessibility and convenience. It will be a very interesting case study to watch the scramble for real estate in places where Amazon chooses to build out their stores.

Cathy Hotka

There have been too many stores for years now and, bafflingly, new stores are added every day. A mall near me was demolished except for the Lord & Taylor store, which now stands alone with its parking lot surrounded by a dirt field. The industry will be in a much better spot when the excess capacity is converted to other uses.

William Hogben

What defines good real estate for retail? Two factors: does it get customer attention and is it convenient for them to access? Nowadays that’s not physical real estate, it’s digital. Everyone’s walking around with their faces in their phones and if that’s where your customers are putting their attention, that’s where you need to be. The home screen is the new hottest real estate, because once you’re there you’ve got their attention more than 100 times per day as they access their phone. Earning that spot is twice as hard though — you can’t just buy it — you’re competing not just with other retailers but with Facebook, Uber, Airbnb, etc. Retailers’ apps need to really make life easier for customers like those to compete in the new real estate market — or should I say, “virtual estate.”

Dick Seesel

The U.S. has for many years had far more retail square footage than any other country: 25 to 50 square feet per capita (depending on how you measure it) compared to 2.5 square feet per capita in Europe. It’s apples and oranges but it still illustrates that the “overspace” problem in the U.S. existed long before e-commerce put additional pressure on all that space.

The residential real estate market deleveraged after the Great Recession but retail real estate is unwinding at a slower pace. And all that footage in shopping centers is not going to be gobbled up by traditional department stores or mall-based retailers, who already have too much space. The challenge is how quickly the space can be redeployed for food, drug and discount retailers who might actually need the added locations.

Lee Peterson

He’s right. About a lot of things, by the way. But it’s not only a pure space bubble, it’s the quality of those spaces that’s driving the lack of foot falls. Take Hayne and Co.’s idea behind their UO Spaces concept. That works. But to just stack it high and open the doors anymore is an arcane idea that consumers are no longer responding to.

In the past most retailers were focused on three things: logistics, procurement and operations. Not one of those is customer focused. In the future, all retailers will have to spend much more time on customer-driven initiatives like service, convenience and experience. It’s either that or turn your business over to the 900-pound gorilla where leading with the customer is a part of their DNA.

David Livingston
2 years 11 months ago

It all comes down to having a good business model and a good location. Stores that I see failing have a poor business model, poor locations and lack skills in real estate negotiation. There is always room for more businesses of any kind, but the weaker ones will need to go away. My advice to mediocre retailers is to stop trying to cure your problems by building more stores and instead fix your business model.

Peter Charness

To Cathy’s point, we’ve been over-stored in comparison to most places for probably 20 years. In the omnichannel world the store should have a role beyond the local shopper, so old measurements of store profitability should also get revised. I do wonder when the cost of the store (which if lower would change the equation dramatically) will also be challenged. Many of the malls in existence today are paid off but rents haven’t changed. Perhaps the retail revolution needs to also move upstream to the mall owners.

Ryan Mathews
We knew there was too much retail real estate out there before e-commerce sales began in the early 1990s. There were too many stores and too much square footage inside many stores. The “bubble” — if it in fact is a bubble — has been about 50 years in the making. While the housing crisis centered on financing demand, the retail real estate crisis has its origins in expansionism and greed. The idea was if you had all the desirable space your competition couldn’t attack you. That worked OK until retailers faced competition from retailers who had no need for physical space at all. The solutions are easier said than done. If you are overstored, cut locations. If your stores are too big — adjust them down. The real estate expansion has never been about actual need — it’s been about grabbing market share and, for public companies, showing the analysts that business must be good because you are expanding. It’s past time for logic to start driving the process but, as I said, that’s… Read more »
Fool Me
2 years 11 months ago

Once again we have the patient diagnosing the illness, like the child lost in the forest who sees trees in every direction. The problem is that we did build more ground than we had demand for, however the “forest problem” is that while we built Cadillac facilities we failed to staff them with competent personnel. Who wants to walk into the “Cadillac” dealership and not be recognized, greeted or worse yet be forced to beg for help from someone being paid minimum wage texting on their smartphone while ignoring paying customers? If you have ever shopped at a Target store, there is never anyone to ask a question of nor anyone to help you. Top that off with the management’s intent of political posturing and it has led to a multi-billion write-down of their value. You have to give me a reason to shop in you store rather than on Amazon — hello!

Camille P. Schuster, PhD.

Why assume stores have to be designed and used they way they always have been? If customers are demanding experience and personalization what else can you do with your space? Rather than bemoan the amount of space that a retailer has, think about what you could do to make your customers happy, satisfied and loyal. I can think of lots that I would like to see.

Brandon Rael

The perceived real estate retail bubble could be mitigated by not simply following the outdated belief that location is king, and that if you build it they will come. A transporting, experience based, value-added shopping journey is what will win the hearts and minds of the customer, who still enjoys going to a brick and mortar location.

Retailers need to change the narrative from simply building a large scale department stores, and believing that will attract crowds of people. While the industry is evolving into a hyper connected digital world, approximately 90% of retail transactions are influenced by the in store experience. Consumers still want and desire an in store experience, where they can build and cultivate an emotional, social and loyal relationship with a retailer.

The onset of retail pop-ups and store within stores have become another way for smaller to mid sized brands, to mitigate the real estate risks. The limited time offers, and build up of excitement around a pop-up based strategy is a winner in today’s experience first retail economy.

Ed Rosenbaum

Yes, we have been over saturated with brick and mortar locations for years and it does not appear to be changing. Cathy made a reference to a demolished mall with only one anchor remaining. I saw the same thing where we are in a location that has been less than successful for close to thirty years. We can’t keep saying “build it and they will come” because people are not coming any longer. Not when it is easier to go online to fulfill our needs.

The next question becomes, what is going to happen to the empty stores? We had this same discussion several years back when the “depression” hit. Nothing changed then, and now we have more open locations on the horizon. I am not smart enough to have the answers.

Brian Kelly
2 years 11 months ago

Apparel versus sporting goods or office supplies? Five years ago or next month? I think many retail sectors have seen significant consolidation. Recall CES 10 years ago? How about department stores 20 years ago? So it’s not just apparel.

The overcapacity issue is related to a market’s economic viability. In trading areas of prosperity, the stores will remain. In those areas with fewer resources, the less relevant stores will go away — and be replaced by stores that are now more relevant: off-price and convenience stores.

Evaluate the chambers of commerce, trend of HHI and unemployment rate for each store’s trading area within the chain’s portfolio. Then consider if the Trump Administration actions will benefit the area. Some jobs will return, but return to what locations?

Craig Sundstrom

That adding too MUCH space would lead to soaring rents is, of course, a non-sequitur, but I agree with the basic premise of overbuilding … doesn’t everybody? (Though whether/not apparel is more/less overbuilt than other sectors I can’t say). And the shift to online shopping along with changes in the buying habits of younger consumers will only exacerbate this.

So the real question is what to do about it: should — can? — it be repurposed, or must it simply be demolished … and what will be the impact of that on the commercial real estate sector?

Min-Jee Hwang

In the Bay Area stands a well-known mall called Vallco. This mall has been known to be dead and empty for years with only a few attractions keeping the area alive. The surrounding area in recent years has been bringing more traffic around but the mall itself remains relatively deserted. Dead real estate like Vallco should be demolished and replaced. Retail chains should adjust to smaller stores with a larger focus on BOPIS to reduce overhead and adapt to the omnichannel trend.

"The nature of the stores that are needed has changed. It's now more about the right size stores in the right locations."
"The “bubble” — if it in fact is a bubble — has been about 50 years in the making."
"Perhaps the retail revolution needs to also move upstream to the mall owners."

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