One of the main reasons that KKR & Co., Bain Capital, and Vornado Realty bought Toys “R” Us in 2005 for $7.5 billion was because of the supposedly valuable property owned by the company.
Real estate ownership by retailers was an excellent safety net as it provided another means of revenue should the “shop on the plot” not be driving the desired results. They could sell or lease buildings to more successful retailers and still make money. But what if consumers simply don’t shop at brick-and-mortar stores anymore? The real estate investment no longer holds as much value.
So far in 2018, aside from the closing of all Toys “R” Us locations, J. Crew and Sam’s Club will also be closing several stores across the country. These closures will result in an estimated 77 million square feet of vacant retail space- on its way to surpass the record of 105 million vacant square feet announced for closure last year.
With the continued shift from onsite to online shopping, a huge amount of retail real estate will meet its’ end. These vacancies will also spoil the traffic to other retailers who are left stuck in repellant half-rented malls with “For Lease” signs at every other storefront.
Many online retailers however are flourishing in physical locations. Amazon is opening book stores and expanding their newly acquired chain of Whole Foods stores. Apple Inc.’s stores remain as busy as ever and other online entities like Warby Parker and Blue Nile are getting into the mix. Also on the plus side, many retail property owners have found that converting spaces for office and other uses is working well and increasing their values.
But for retail property owners who can’t flip their holdings for other uses, it seems that the struggle will only worsen as less and less investors become interested in buying and selling commercial real estate.
What do you think?