Retailers open more stores than they close, aided by cheap rent

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

From Ulta Beauty and Sephora to Dick’s Sporting Goods, Five Below and TJ Maxx, companies are recovering from the Covid pandemic and are heading for expansion plans that have been put on hold. In the latest example, athletic apparel retailer Fabletics said Thursday that it will open two dozen stores in the United States this year. Even Toys R Us, the beloved toy chain that filed for bankruptcy in 2017 and eventually wound up, has a new owner looking to open stores before the 2021 holiday season.

Retailers are eager to double the number of brands that have remained strong during the pandemic-induced recession. Or they are eager to test new concepts that can attract new customers. And cheaper rents make these opportunities irresistible.

According to a tracking by Coresight Research, US retailers have announced 3,199 store openings and 2,548 store closings since the beginning of the year. The company tracked a staggering 8,953 closings last year, along with just 3,298 openings, when the pandemic rocked retail and left dozens of companies out of business.

Looking back further, there were a total of 4,548 openings announced by retailers in 2019 and 3,747 in 2018, Coresight said. So far, in 2021, the openings are on the right track every year earlier, he said.

After a tsunami of store closures in 2020, the retail real estate landscape is full of vacancies. Mall and shopping center owners across the country are looking for tenants to fill that space quickly. Meanwhile, some retailers are more optimistic about getting through the dark days of the pandemic. They want to take advantage of a market where they largely have more power over their landlords when they sign new deals or bring negotiations to the table.

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

In leading retail markets such as Manhattan – which are typically a mecca for tourists and office commuters – the trends are especially pronounced. According to a semi-annual report from The Real Estate Board of New York, retail rents in New York City fell to all-time lows last fall, by as much as 25% from 2019.

And rents still fell from the third to the fourth quarter. Average retail rent fell 1.6% quarter-on-quarter, according to JLL. The decline 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 were down 4.8% in the Madison Avenue neighborhood.

Meanwhile, empty storefronts remain a problem for landlords. According to a separate tracking by CBRE, retail property vacancy rates in New York City grew 21% year over year in the fourth quarter.

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

Many of the companies that have planned openings this year are focused on value. They range from Dollar General and Dollar Tree to off-price retailers Burlington and Ross Stores and the discount stores Aldi and Lidl. However, there are specialty stores in the mix, including L Brands’ Bath & Body Works and Gap’s Old Navy.

These retailers were among the strongest performers in the industry. For example, during the fourth quarter of L Brands, same-store sales at Bath & Body Works increased 22% year over year, while at Victoria’s Secret they fell 3%. At Gap, sales at the same Old Navy store were up 7% in the fourth quarter, while the eponymous brand was down 6%. Dozens of Gap and Victoria’s Secret stores will close this year as both companies invest in expanding their superior brands.

Some real estate experts say the growth is reminiscent of what the industry saw during the Great Recession. Retailers’ confidence is good as they plan more stores – both inside and outside shopping centers.

“We are very excited about the shopping centers,” said Jay Schottenstein, CEO of American Eagle Outfitters, on a conference call about earnings in early March. “This is probably the best opportunity for us to pick up new locations that are offered to us … at affordable rental rates for us.”

American Eagle plans to open approximately 60 locations this year under the banner of Aerie, the loungewear and lingerie brand for teens and young women. Twenty-five to thirty of those new stores will be branded as Offline by Aerie, an athleisure line that the company debuted last summer.

Part of the activity is an outgrowth of experiments rippling through the industry. Take Burlington Stores. It opens up a handful of smaller-sized prototypes that it hopes to scale up in the future.

It plans to open 75 net new stores this year, including 18 previously planned 2020 openings that were postponed by the pandemic. About a third of the new stores will be smaller, about 25,000 square feet, compared to the typical 50,000 to 80,000 square foot location, the company said.

“This will be an important year for experimentation,” said Deborah Weinswig, founder and CEO of Coresight Research. “There has always been this friction with the landlords, because they have tried to get as much rent as possible from the tenants. That is of course their job. But I think it actually hurts innovation.”

This year, Weinswig expects companies to test everything from smaller stores to so-called dark stores that serve exclusively as hubs for shoppers to pick up online orders. Experimentation can also take place in other ways. Nordstrom, for example, tests shoppable, livestream shows.

“It’s a tenant market right now,” said Perry Mandarino, head of restructuring and co-head of investment banking for B. Riley FBR. “I’ve seen examples of short-term leases with easy outs, and decent prices are definitely available.”

Still, not every retailer believes that Americans will return to the stores so quickly.

“In two years, if the market looks back on me, I will either be seen as visionary or slowly make the switch,” said Jerome Griffith, CEO of Lands’ End in an interview. Lands’ End has only 31 stores of its own today and does not intend to grow that number, but is investing in e-commerce.

“I don’t feel positive about pedestrian traffic in stores,” said Griffith. “People will be doing things, people will be outside, but it will be things like going to restaurants and bars and going to movies, going to sporting events, going to concerts. But I’m taking a very careful approach to our stores.”

“We have stopped expanding stores,” he said. “While I told you two years ago that it is going to be a big part of our growth strategy.”