Rising Online Sales Could Keep Retail Vacancies Elevated

CRE Finance World, Summer 2012

Rising Online Sales Could Keep Retail Vacancies Elevated Howard Esaki James M. Manzi, CFA Managing Director — Senior Director — Global Head Structured Finance Research Structured Finance Research Standard & Poor’s Standard & Poor’s A the holiday season, according to the U.S. Department Growth In Internet Retail Sales, 2001-2011Chart 1s more and more people turn to the Internet for shopping,the threat to brick-and-mortar stores has been growing.In 2001, online sales represented 1% of total retail sales; in2011, that figure was up to 5% and reached 5.5% during of Commerce. Standard & Poor’s Ratings Services believes this trend has the potential to push retail vacancy rates 3 percentage points higher over the next 10 years versus where they would be if Internet sales remained stable as a percentage of retail sales. By decreasing sales at brick-and-mortar retail stores, the growth in e-commerce could lead to higher numbers of store closings, all else being equal. This, in turn, could hurt commercial mortgage-backed securities (CMBS) with high exposure to threatened stores. The Retail Vacancy Rate Rose 0.2% In 2011 As Store Closures Continue The retail vacancy rate ended 2011 at 13.2%, up slightly from Source: Retail Indicators Brance, U.S. Census Bureau 13.% in 2010, according to CBRE Econometric Advisors (CBRE- Online Sales Push Our Retail Vacancy Estimate Higher EA). The possible rise in retail vacancies due to competition from Internet-based companies over the next decade has the potential As online sales continue to grow over the next decade, we would to negatively affect CMBS credit. Internet competition was a factor expect retailers to demand less physical space, and as a result, the in the recent bankruptcy of the Borders bookstore chain, which retail vacancy rate will likely rise. To test this hypothesis, we ran a Trepp lists as a tenant in 60 CMBS transactions. In addition, store regression model using the national retail vacancy rate (as mea- closure announcements accelerated in the latter part of 2011 and sured by CBRE-EA) as the independent variable and the unem- have continued into early 2012. We recently identified 20 CMBS ployment rate, nonresidential construction starts with a three-year in which the exposure to announced store closings exceeded 1% lag, and online sales as a percentage of total retail sales with a of the principal balance. Also, certain stores are currently facing one-year lag as the dependent variables (see chart 2). The con- stronger competition from Internet-based companies than others. struction lag reflects the time between the start of a retail project For example, online retailer Amazon.com has become a competi- and completion. The lag we use for online sales captures the time tive threat to retailers such as Bed Bath and Beyond and Best Buy, we estimate it takes to close a physical retail store in reaction to a according to a recent Morgan Stanley survey(i). Both companies drop in sales. are major tenants in properties with CMBS loans. (See chart 1 for Internet sales growth.) CRE Finance World Summer 2012 28


CRE Finance World, Summer 2012
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