Unprepared Retailers Left Behind in Digitally Driven Environment

By Dennis Kaiser

The retail sector continues to quickly evolve, forcing adaptation and creating new opportunities for some. Yet, others in this new age of retail are quickly getting left behind. There is a rush to give consumers a reason to frequent brick-and-mortar locations by creating an experiential space — such as Apple’s Chicago store pictured above. That strategy continues to be the primary focus for retailers and investors, according to a new report from Marcus & Millichap.

Well-established brands shuttering stores have become a common theme in recent years, as companies who fail to adapt to the new retail reality operate with outdated strategies, notes Marcus & Millichap’s Scott Holmes.

A high-profile casualty of the rapidly-evolving retail landscape is Toys R Us, which entered bankruptcy protection and ultimately may lead to the closure of roughly 800 locations. Combined with a weakened balance sheet, the retailer was unable to make investments to modernize its business model and compete with Amazon, Walmart and Target.

The soon-to-be vacated stores could bring much needed retail space to the market. Due to the lengthy leases of many Toys R Us locations, the closures will give landlords opportunities to adjust rents to match current market conditions, as many of the lease agreements include below-market rates, notes Marcus & Millichap. The ample amount of space anticipated to come online in the following months should support more competitive rents in neighborhoods most affected by the company’s liquidation.

Landlords will soon have the option to choose a tenant better positioned to compete in the dynamic retail climate. Although the number of retailers targeting 30,000- to 40,000-square-foot locations is limited, many retailers capable of filling these spaces have reported strong performances in recent years and are seeking expansion.

Vacant Toys R Us stores will present companies with opportunities to broaden their footprint and gain market share in their respective industries. That includes such categories as:
– Fitness centers, which have been expanding at a rapid pace as they attempt to keep stride with the growing health-conscious community.
– Gyms, which act as a junior anchor for strip malls and power centers due to their propensity to increase foot traffic.
– Expanding grocery chains could potentially seek some of the dark locations, as they are the ideal size for many companies. Grocer brands with traditionally larger layouts may also target the shuttered stores as they shift to smaller formats attempting to maximize sales per square foot.
– Discount retailers like Ross and T.J. Maxx are also feasible tenants, as they have some locational flexibility due to their brand-based consumer appeal.

With retail continuing to evolve at a brisk pace, filling the soon-to-be vacant Toys R Us locations may require improvisation. Marcus & Millichap points out the inability to occupy the entire space with one retailer may result in subdividing the space into multiple sections, however, bay depth could present a challenge.

For comments, questions or concerns, please contact Dennis Kaiser