Retailers open more stores than they close, helped by a cheap rent

For the first time in years, retailers across the country plan to open more stores than they close.

From Ulta Beauty and Sephora, to Dick’s Sporting Goods, Five Below and TJ Maxx, companies are recovering from the Covid pandemic and eliminating the expansion plans that were left in abeyance. In the latest example, sportswear retailer Fabletics said Thursday it will open two dozen stores in the United States this year. Even Toys R Us, the beloved toy chain that went bankrupt in 2017 and finally liquidated, has a new owner who wants to open stores before the 2021 holidays.

Retailers want to double the marks that remained strong throughout the pandemic-induced recession. Or, they are happy to try new concepts that can attract new customers. And cheaper rents make these opportunities irresistible.

According to a follow-up to Coresight Research, U.S. retailers have announced 3,199 store openings and 2,548 closures. The company tracked 8,953 closures, along with just 3,298 openings, last year as the pandemic revalued the retail industry and bankrupted dozens of businesses.

Looking back, there were a total of 4,548 openings announced by retailers in 2019 and 3,747 in 2018, Coresight said. So far, in 2021, openings are already going at the pace of the rise every year before, he said.

After a tsunami of store closures in 2020, the retail real estate landscape is full of vacancies. Mall owners and malls across the country are looking for tenants to fill that space quickly. Meanwhile, some retailers are more optimistic as the dark days of the pandemic have passed. They are looking to take advantage of a market in which they largely have more power over their owners when they sign new agreements or put negotiations on the table.

“There is more space available and today we can get better conditions than two years ago,” Fabletics co-founder and CEO Adam Goldenberg said in an interview.

In major retail markets such as Manhattan, which are typically a mecca for tourists and office travelers, the trends have been especially pronounced. New York City retail rents fell to historic lows last fall, dropping as much as 25 percent from 2019 levels, according to a half-yearly report from The Real Estate Board of New York.

And rents were still down from the third quarter to the fourth. Average rents fell 1.6% quarter-on-quarter, commercial real estate services firm JLL said. The fall was more severe in certain markets: along Lower Fifth Avenue, from 42nd Street to 49th Street, for example, retail rents fell 7.6% quarter-on-quarter, JLL said. They fell 4.8% in the Madison Avenue district.

Meanwhile, empty shop windows remain a headache for homeowners. Retail real estate vacancy rates in New York City rose 21% year-over-year during the fourth quarter, according to a separate CBRE follow-up.

“After the pandemic, we can get back to training classes in stores and special shopping days,” Fabletics ’Goldenberg said. “There’s a real sense of community that comes from having a physical presence.”

Many of the companies that are scheduled to open this year focus on value. They range from General Dollar and Dollar Tree to retailers Burlington and Ross Stores, and Aldi and Lidl supermarkets. However, there are specialist retailers, including Bath & Body Works by L Brands and Old Navy by Gap.

These retailers have been some of the strongest artists in the industry. During the fourth quarter of L Brands, for example, sales at the same Bath & Body Works stores rose 22% year-over-year, while they fell 3% in their Victoria’s Secret business. At Gap, Old Navy sales at the same stores rose 7% during the fourth quarter, while its brand of the same name fell 6%. Dozens of Gap and Victoria’s Secret stores will close this year, while both companies are investing in expanding their top brands.

Some real estate experts say the growth is reminiscent of what the industry witnessed at the exit from the Great Recession. Retailers ’confidence increases as they shop more: both inside and outside malls.

“We’re very excited about the malls,” Jay Schottenstein, chief executive of American Eagle Outfitters, said during a conference call on profits in early March. “This is probably the best opportunity to pick up new locations that are being offered to us … in affordable rentals for us.”

American Eagle plans to open approximately 60 stores this year under the Aerie banner, which is its brand of loungewear and underwear for teens and young women. Twenty-five to 30 of these new stores will have the Offline brand for Aerie, a line of entertainment the company launched last summer.

Part of the activity is a result of the experimentation that is spreading through the industry. Grab the Burlington stores. It opens up a handful of smaller format prototypes that it hopes to scale in the future.

It plans to open 75 new clean stores this year, 18 of which were pre-planned openings for 2020 and were delayed by the pandemic. About a third of the new stores will be smaller, at about 25,000 square feet, compared to their typical location of 50,000 to 80,000 square feet, the company said.

“It’s going to be a great year for experimentation,” said Deborah Weinswig, founder and CEO of Coresight Research. “With landlords, there’s always been this friction, as they’ve tried to extract as much rent as possible from tenants. Of course, that’s their job. But I think it actually hurt innovation.”

This year, Weinswig expects companies to try everything from smaller-format stores to so-called dark shops that serve only as malls so shoppers can receive orders online. Experimentation can also come in other ways. Nordstrom, for example, is rehearsing live and live shows.

“It’s now a tenant market,” said Perry Mandarino, head of restructuring and co-director of investment banking at B. Riley FBR. “I’ve seen examples of short-term leases with facilities and a decent price is absolutely available.”

However, not all retailers believe that Americans will return to stores so quickly.

“In two years, as the market looks back at me, I will be considered a visionary or I will be slow,” Lands ’End CEO Jerome Griffith said in an interview. Lands’ End has only 31 stores of its own today and does not plan to grow that number, but is channeling investments in e-commerce.

“I don’t feel positive about the walking traffic from the stores,” Griffith said. “People will do things, people will go out, but it will be like going to restaurants and bars and going to the movies, going to sporting events, going to concerts. But I take a very prudent approach to our stores.”

“We’ve stopped expanding the store,” he said. “Although, two years ago, I would have told you that it will be an important part of our growth strategy.”