Cleveland, Memphis, and Chicago lead the way among metro areas where retail development has outpaced growth in demand.
What were they thinking in Cleveland?
Real estate developers built more than 21 million square feet of new store space in the Northeast Ohio metropolitan area from 2000 through the first three months of this year, increasing its retail footprint by 21 percent.
But while the new stores were moving in, the shoppers were moving out. The metro area’s population declined by more than 90,000 over a similar period, and it became a stomping ground for students of the dying American mall.
Across the U.S., retail real estate development that outpaced demand marked the early years of the new millennium. Now retailers are going bankrupt at a record rate, and hedge funds are betting against the commercial mortgages used to finance mall properties. Credit Suisse this month predicted that as many as 275 malls, a quarter of the U.S. total, will close in the next five years.
The woes of brick-and-mortar retail come partly from the rise of e-commerce, which has grown to about 8 percent of retail sales, from less than 1 percent in 2000. But they are also self-inflicted, according to Suzanne Mulvee, director of research at CoStar Group Inc. The industry built new stores faster than the consumer could spend at them.
The chart above shows the relationship between the changes in retail space and buying power in 16 large U.S. metro areas from 2000 through the first three months of 2017. In the three cities that show up above the red trend line, buying power outpaced retail development. In the rest, new development outpaced local demand. (CoStar calculated buying power as a function of median income and population.)
Another way to express the changes: In Cleveland, the amount of buying power per square foot of retail space declined by 26 percent, while in San Francisco it increased by 21 percent. The data don’t account for sales that brick-and-mortar retailers have lost to Amazon .com and other online sellers. Instead, they reflect increased competition for shoppers who visit physical stores, and show what all that surplus brick and mortar has done to existing malls, on top of e-commerce. The chart below suggests which metro areas could see more struggling malls close.
In Cleveland and Chicago, developers chased growth that was being undercut by shrinking or static populations. In Phoenix and Atlanta, the builders erected new retail space in anticipation of population growth that was delayed when the housing bubble burst. Even in Houston and Dallas, whose local economies fared relatively well through the Great Recession, developers outbuilt the growth in buying power.
Mall owners didn’t just cannibalize themselves, Mulvee said. The rise of retail developments built around one or more big box stores put pressure on traditional players, since category killers like Best Buy Co. Inc. and Bed Bath & Beyond Inc. could offer better selection and lower prices than a shopper would find at a department store such as Sears Holdings Co. That was bad for the department stores that anchored malls, as well as for the smaller retailers that depend on anchors to drive foot traffic.
Lately, big mall operators have focused on higher-end shopping centers, whose offerings have proved more resilient in recent years. Separately, a handful of investors see a chance to breathe new life into old malls in small cities, where the properties have become outdated but competition is sparse. Old or otherwise down-market malls in big metros face a bleaker fate.
But shuttered stores and dying malls haven’t brought construction of new retail space to a halt. A collection of 55 U.S. metros will add 831 million square feet of retail space in the next five years, CoStar projects. That’s about 50 percent less space than the industry added in the five years beginning in 2000, though it comes as e-commerce continues to grow.
Why do developers keep building, even as stores close?
In 2000, the Cuyahoga County Planning Commission published a report noting that the Northeast Ohio market was already saturated, and that new development about to come online threatened to push vacancies up and rents down. After the report was published, the commission got pushback from real estate developers, Kevin Leeson, one of the authors, recalled: “We heard a lot of ‘We don’t have too much retail. We have too much obsolete retail.'”
More than 12 percent of the metro’s retail real estate sat vacant in the second quarter of 2017, according to data compiled by CBRE Group, the highest rate in more than 10 years.
The area will add another 4 million square feet of retail space by 2021, according to CoStar.
by Patrick Clark and Dorothy Gambrell
