Retail Zombie Apocalypse Exponentially Greater Than Vacancy Rates Indicate

WolfStreet |  Another regional long-established department-store chain bites the dust. One in an endless series. The 16 Magic Mart stores in West Virginia, Virginia, and Kentucky, plus a distribution center and the company’s headquarters will be closed and liquidated, according to Ammar’s, Inc., a family-owned company that owns the stores and started with its first store 97 years ago.

In a letter to employees, the company blamed “continued inadequate sales leading to substantial financial losses,” and “difficult economic conditions that continue to persist in the markets we operate.” All locations will be closed “sometime around November 1.”

And then those stores, many of them located in less than booming environments, will become vacant.

Department stores have been hardest hit by online retail. Among them, regional chains have been hardest hit. Bon-Ton Stores – which operates department stores in 23 states under the brands of Bon-Ton, Bergner’s, Boston Store, Carson’s, Elder-Beerman, Herberger’s, and Younkers – is now in the process of being liquidated. 24,000 employees are losing their jobs. Numerous smaller chains have shut their doors. Among the national chains, store closures have been widespread: Macy’s, Sears, Kmart, J.C. Penney, etc. have closed thousands of large stores over the past few years. Smaller stores and specialty stores are shutting down across the country. And these stores become vacant.

Landlords have to find other tenants in this environment, or find another purpose, such as redeveloping them for use by chain restaurants, or bulldozing them and building office buildings or apartment buildings or whatever on the land.

Bon-Ton combined with Toys ‘R’ Us – which closed its remaining stores on Friday – occupied nearly 60 million square feet of retail space. Every square inch is now being vacated.

And there’s some handwringing about the so-called “vacancy rate” in the retail sector – a deceptively low measure for reasons that we’ll get to in a moment.

The retail vacancy rate rose to 8.6% in Q2, the highest since 2012, according to data from real-estate research firm Reis Inc., cited by MarketWatch. By comparison, the peak since the Financial Crisis was 9.4% in Q3 2011:

The impact is especially severe among strip malls and other neighborhood and community shopping centers, which suffered their worst quarter in nine years. About 3.8 million square feet of space was emptied from April to June, pushing the vacancy rate for this type of mall up to 10.2%, Reis said.

Note the magnitude: 3.8 million square feet were “emptied out.” This is tiny compared to the 60 million square feet emptied out by just Bon-Ton and Toys ‘R’ Us.

This is why the “vacancy” data, as unappetizing as they may be, aren’t in a steep swoon, though you’d expect them to be, given the rampant store closures.