The Retail Market
Thank God for the end of 2020. Nearly 12,000 store closures and numerous bankruptcies only tell part of the story. Have no doubt, there is more to come. Expect more closures and bankruptcies in the first half of 2021 as a number of tenants, particularly small shop tenants, restaurants and entertainment concepts have stretched as far as they can stretch. 2021 will be the year of retail recovery, but it will be a very uneven, choppy recovery. Unbelievably, overall retail sales will increase nearly one percent this year (eMarketer); this is truly amazing given the pandemic and election year chaos. Keep in mind that about 60 percent of retailers are either doing about what sales they did before the pandemic or better. These are the general merchandisers (Target & Walmart), grocery stores, discounters, home improvement stores, and, of course, Amazon. Compared to last year, Dollar Tree’s sales were up 7 percent in the 2nd quarter, 5.1 percent in the third; Costco saw 1st quarter 2021 sales increase 21 percent; Academy’s 3rd quarter sales were up 17.8 percent; Lowe’s, up 30.1 percent in the third quarter; Big Lots' sales have been through the roof. And it's not always the tenants you think it would be, Ulta’s sales are up, Lululemon saw a 22 percent third quarter increase. These types of tenants and their sales have driven overall sales growth.
But the pain is real for the retailers in the other 40 percent. These are the tenants that have closed stores, downsized and declared bankruptcy – Guitar Center, Lord & Taylor, Ascena, Brooks Brothers, JCP, J Crew, and Pier 1 – all storied names in retail have declared bankruptcy. Most will come out the other side smaller and stronger, at least financially. Many were in trouble due to being over-leveraged or having lost their way with their customers (or both) prior to the pandemic. This year has not been kind to fashion retailers, boutiques, experiential or entertainment tenants. J Jill’s 3rd quarter sales were down 29.4 percent; Designer Brands was off 30.1 percent; department store sales, already in decline, were down 14-30 percent depending on the retailer in the third quarter. (sales data provided by Creditntel)
Geography makes a difference too, performance has been very uneven across the country – the parts of the country that have remained open or tempered their lock-down have seen a much quicker recovery in sales. In Oklahoma City, our limited restrictions, regardless of your politics on them, have helped our retail market. In the damning with faint praise category, it also helped us that retailers had already adjusted to our energy downturn and were better prepared for what lay ahead.
The pandemic’s effect on our market has been felt with vacancy increasing to 9.7 percent at year-end from 8.7 percent a year ago and 9.2 percent at mid-year. We anticipate further vacancy, though not a dramatic increase, in the first half of the year. Unfortunately, restaurants and local tenants will bear much of this burden. As we’ve said many times in the past, this is the nature of retail, the creative destruction has just been accelerated this past year. This gives good retailers more of an audience, puts a bullet in the head of bad retailers, allows retailers to upgrade locations, and creates opportunities. Retail is entrepreneurial at its heart. There will be new concepts created out of this. We tend to know the tenants that aren’t doing well, but we seldom know the next Lululemon. Who knew that Dollar General would start pOpshelf or Dick’s would create Public Lands. Retailers have also figured out that physical stores are a necessity, whether you have no online presence like TJ Maxx or you need a store to boost your online sales like Warby Parker. At the end of the day, the retail sales process for most retailers will end up being a seamless/online experience and, to the surprise of many, the market will need all the square footage we have now.
As we look forward to both retail and general economic recovery, a few things would help: Clearly first on this list is a sooner than later end to the pandemic and, for retail, a willingness for shoppers to return to stores. Next is the energy market - we either need a recovery or at least the recovery of some of the lost energy jobs. Small business is the backbone of almost any economy, including ours; given how hard they’ve been hurt this past year, their recovery is paramount. For retail, these broad and difficult issues almost all translate to population and income growth. In our market, it has historically been much more about population. Retails’ best performance these last few years has been when we have grown 1.2 to 1.6 percent per year – the last three years, we’ve returned to our historic growth rate of about .9 percent per year. Oklahoma City has done better than expected during a very difficult year; 2021 will be a challenge, particularly in the first half of the year, but expect good things to happen as the vaccine takes hold and some pent-up demand is unleashed.