How the Fallout Will Play Out – Commercial Observer
IIt’s the perfect 2020 round-up to say that being a bankruptcy attorney than a retailer has been a much better year in the commercial real estate industry.
While a certain number of retail bankruptcies are to be expected in recent years, as e-commerce has sparked strong competition for brick-and-mortar stores, the pace of this year’s retail bankruptcy news has been dizzying.
Neiman Marcus, JCPenney, Brooks Brothers, Lord & Taylor, CEC Entertainment (parent company of Chuck E. Cheese), Pier 1 Imports, Modells Sporting Goods, J.Crew, Century 21 Department Stores, Aldo and Guitar Center are just a few of the many Companies that filed for bankruptcy in 2020.
“The past 12 months have been a bloodbath,” said James Famularo, president of Meridian Retail Leasing. “[For brands like] Modells and True Religion, the writing was on the wall. But Neiman Marcus, J.Crew, Brooks Brothers – these companies are cult. It’s been around for generations. It’s amazing. “
Not all bankruptcies were fatal. While some brands like Lord & Taylor and Century 21 have gone for good, companies like Neiman Marcus, Brooks Brothers, and Ascena Retail (parent company of Ann Taylor and Lane Bryant) will survive their filings, albeit with a smaller retail space.
While the COVID-19 pandemic certainly makes up the sheer breadth of the list, it is only one factor in many bankruptcies and is often a definitive straw rather than a major cause.
“The basics [for many of these companies] have been wrong for a long time, “said Kate Newlin, CEO of Kate Newlin Consulting. “I think if we haven’t seen [these bankruptcies] this year we would have seen her next year. There is nothing urgent to drive people back to the mall. There was systemic erosion underneath, and as long as they could mask some of it by selling things at discount, they might have been able to skate for another year. But COVID was a tough stop. It was a quick run-up to the final result, but it certainly wasn’t the only cause. “
In many cases, the COVID-19 pandemic merely accelerated a process sparked years ago by online competition or bad decisions, or by private equity firms taking over some of these businesses that demanded dividends and left retailers with debt.
“The headline is that it’s all about COVID, but there are enough examples of companies that don’t really distinguish them. They reached this endpoint a little faster due to COVID, which may have shaved 18 months, ”said Soozan Baxter of Soozan Baxter Consulting.
“Pier 1 is a brand that honestly couldn’t keep up,” she said. “You have been outwitted by some innovations and creations from other companies. Take a look at Target and contrast that with what Pier 1 has to offer. You can probably get everything Pier 1 sells for a better price and possibly branded. Then why don’t you have to go to Pier 1 anymore? “
“I wouldn’t put everything at the feet of COVID for Neiman Marcus,” Newlin said. “The Hudson Yards [store] was a disaster long before COVID. I think there were missteps along the way that COVID has certainly made the terminal faster. “
Due to the cumulative impact of these bankruptcies and other store closures, the retail vacancy rate was 20 percent by mid-year, according to the National Association of Realtors.
After Neiman Marcus closed his Hudson Yards Store in July, the two developers Related Companies and Oxford Properties announced that they would be marketing the space for office use again. While understandable given the negative outlook for retail, COVID-19 has also made the fate of the office more difficult. If developers try to convert large numbers of retail spaces into offices, it could just spread the misery.
“This is an even bigger problem,” said Jonathan Pasternak, partner in the bankruptcy practice of Davidoff Hutcher & Citron, “because not only do you have some retail vacancies, but you may have a lot of vacancies in office buildings.” And this is where you will likely see the next trend in bankruptcy. They have owners in Midtown Manhattan, in the Financial District, and in every city across the country where people haven’t gone to their offices and companies haven’t paid their full rents. This must be some fallout. “
While the general bankruptcy trend will have an impact on retail customers, some of the companies that have filed for bankruptcy are significant enough that they are affecting the retail landscape itself.
“With [a company like] GNC, their stores are small, only 1,000 to 1,500 feet, but there are 5,000 stores, ”said David Firestein, managing partner at SCG Retail, of the nutritional supplement retailer, which announced in June that it was closing nearly 25 percent of its stores and it will announce its sale to China-based Harbin Pharmaceutical Group in October. “It’s very powerful because it pushes so much space back into the market.”
“If you look at Ascena and how many brands and how many square feet they have, this is likely to affect some B-type malls and definitely the outlet industry,” said Baxter. “This is a meaningful company that just disappeared.”
Newlin believes the impact on malls will be more than just a bump.
“You’ll see [stores] Just as JCPenney is getting a new property trying to make it a legitimate shopping destination, ”Newlin said of the legendary retailer that is out of bankruptcy protection and has sold the majority of its assets to Simon Property Group and Brookfield Asset Management. “But basically, without an effective overhaul of what it means to shop, it’s just the IV drop of the end of the days for physical retail.”
Across the board, the apparel sector has been one of the worst-hit companies. Given the ease with which it is easy to shop for clothes online, it is difficult to be optimistic about the future of the industry.
“The volume of bankrupt clothing retailers will really worry surviving retailers looking to open new stores in the future,” said Famularo of Meridian. “Most would probably choose to sell online, if not pop-ups. We get a lot more calls for popups than normal. “
The potential challenge becomes even greater as prior to COVID, more experiential applications were an often discussed potential savior to retail store thrashing. But entertainment of all kinds has perhaps taken the toughest blow of the COVID era as restaurants struggle to survive and the big cinema chains – – Faced with both COVID fears and restrictions, and movies are being released day and date via streaming services or video-on-demand in response – – struggle to avoid their own bankruptcy filings.
“This is one that makes a lot of people nervous because it affects a lot of other tenants,” said Firestein. “When a landlord gets a J.Crew back, it’s a clean box. Even a restaurant has already done much of the restaurant-related work. But the theater space doesn’t work really well for anyone. The remodeling is very expensive as you have sloped floors and all sorts of things that don’t work [for other businesses]. ”
With all the dire news and forecasts, there are some bright spots on the retail horizon. Baxter notes that sports and cosmetics are doing well, and the recent announcement that Harry Winston is nearly doubling his spot on Fifth Avenue shows the persistence of jewelry sales.
“Harry Winston’s expansion really speaks to the category, the power of Fifth Avenue, and the belief that retail will return,” said Baxter.
Pasternak sees the large number of bankruptcies as an opportunity for the right dimensioning.
“Bankruptcy gives these companies the opportunity to cancel some leases, get leaner and meaner, and clean up their balance sheets,” said Pasternak. “I think these things will ultimately be good for the retail economy because they will lead to more efficiency and a better chance of profitability on the return on investment.”
Baxter also sees an advantage in the basic life cycle of the business – – that for every death there can be a new birth.
“A lot of those brands are going to go away, but every time you see a brand go away, imagine that there are probably 15 entrepreneurs sitting there who are the next Jeff Bezos or Tory Burch,” Baxter said. “People are always innovative. For every brand that is being discussed in an “oh my god rest in peace” way, there are others that are really exciting and also brands that are changing the way they do business. “
Given its business volume during the pandemic, Famularo agreed, noting that one brand surrendering to the inevitability is another brand’s golden opportunity.
“New York will spring back. Will we reach the same rent level as a few years ago? I don’t think that’s going to happen in our lives, ”said Famularo. “But my team and I did almost a hundred deals during the quarantine. People feel opportunistic. If you paid $ 10,000 a month for every deal you could have, and I offered [space] Are you waiting on the sidelines at $ 5,000? You will jump upside down. That’s what happened. That’s why I say we’ll be back. I think the renaissance will begin in March, April or May. “