Saturday, February 22, 2020

Simply Too Much Brick And Mortar Retail Space

As I often note when commenting about consumer related data, the consumer is important due to the fact they account for 70% of economic activity in the U.S. With the current economic cycle the longest on record, the consumer continues to show strength and remain in good financial shape. And given a strong consumer it may seem surprising that retail bankruptcies continue at a pretty high pace. Earlier this week Pier 1 Imports (PIRRQ) filed for bankruptcy and this will likely not be the last retailer to face financial headwinds. The following link from CB Insights Research Briefs details 81 retail bankruptcies since 2015.

Non-store retailers like Amazon (AMZN) certainly play a large part in the struggles facing brick and mortar retail stores. However, an issue that looms just as large is the fact the U.S. simply has too much brick and mortar retail store space if a comparison to other areas of the world are any guide. As the below chart from statista shows, the U.S. has 40% more retail space in square feet per capita than the next closest country, Canada.

As a result of issues facing brick and mortar retail, a spillover impact is being felt by retail shopping centers. Not surprisingly shopping center vacancy rates rose following the financial crisis; however, the vacancy rate showed some improvement until about 2016. The first chart below shows a longer term view of shopping center vacancy rates, with the second chart a shorter term view. At the beginning of 2016 the vacancy rate equaled 9.8% and has since risen to 10.2% at the end of the fourth quarter of 2019.

As noted at the beginning of this post, consumer sentiment and the financial picture of the consumer remains healthy. Even retail sales that exclude non-store (online retail) retailers remains at a reasonable level. On a year over year basis brick and mortar retail sales have increased at a 3.8% pace and is about average going back to the beginning of 2002. Faster incremental growth in retail sales is occurring with the non-store retailers though as the below chart shows growth at 8.4% on a year over year basis. At the end of the day, it appears there is simply two much retail square footage per capita which means some retailers will likely continue to face headwinds.

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