GAFO E-Sales

In my retail recruitment experience, I’ve found that there are types of retail stores that clients need and those that they want. The need category generally includes groceries, specialty food shops, pharmacies, etc., while the want category overwhelmingly includes GAFO operations — i.e.,  general merchandise, clothing and footwear, home furnishings, electronics and appliances, sporting goods, book and music stores, and office supply stores. The shops that respond to needs did relatively well through and after the Great Recession, while the GAFO stores have been in consistent decline or weakness since about 2009. Recent research indicates that e-GAFO retailers are now eating the lunch of brick and mortar GAFO merchants.  

An Enormous 45% Hit on B&M Retail Sales Potentials!. One of the most significant trends that has helped define the new normals for retailing and our downtowns is the increasingly significant share of the sales of the merchandise sold in GAFO stores that are being captured by online operations. Obviously, the more sales dollars the e-stores win, the less there are for brick and mortar shops (B&Ms) to capture.

A while back, in another blog posting, I presented the above table, taken from a provocative  study by Hortacsu and Syverson,  that showed  e-store market penetration for a range of retail  categories in 2013 along with estimates of the years in which they each would reach 25%, 50%, 75% and 90% market shares.

A more recent 2019 report by Morgan Stanley suggests that the Hortacsu and Syverson study was pretty sound. It found that while “…e-commerce penetration reached 11% of total retail sales at the end of 2018”  that “e-commerce penetration in the GAFO segment”  was now over 45%.(1) That makes it so much harder for B&M GAFO retailers to survive, much less thrive, unless they are executing or part of an omni-channel marketing strategy.

The Morgan Stanley report also found that “the shift to e-commerce has hit the home-furnishings segment the hardest,” while clothing, linens and other “soft” goods have experienced a significant “e-commerce disintermediation” with a 22% e-commerce penetration expected in 2019. (2)  It was long thought that these two retail segments would be resistant to e-store penetration because one offers large and heavy merchandise and the other offers merchandise that consumers would want to touch, feel and try on. One weakness of such thinking was the failure to recognize that so many of the soft goods we buy are like commodities and we don’t need to touch them, feel them or try them on. For example, lots of people have long bought shirts, trousers, shoes, dresses, swimsuits, parkas from catalogs. They often are buying more garments like the ones they already have – e.g., I have countless blue, button down collar shirts — or replacements for them. Then, too, lots of home furnishings products are not furniture suites or otherwise prohibitively large, while others have been re-imagined – e.g., Casper Mattresses – so they can be shipped “small.” 

How Are the Leakage Analysis Data Providers Dealing With This? Frankly, I do not know the answer to this, but I think the data providers owe their customers a clear explanation of how they are handling this situation. One technique they might be using for estimating consumer demand is to take the sales of retail stores by NAICS code within a certain fairly large geographic area and then divide the sales by the number of households in that study area. That defines demand solely in terms of B&M store sales, ignoring the huge Internet sales and demand. If, instead, they are using extrapolations from BLS consumer expenditure surveys to determine demand, then they must have whopping “leakages” in each of the NAICS codes analyzed unless they also are using data on e-store sales by NAICS code.

The leakages to the Internet for GAFO store merchandise now are probably several magnitudes larger than traditionally defined leakages to B&M shops located beyond the trade area’s boundaries.

Of course, an increasing number of downtown merchants now have both a B&M shop and an e-store. Most of their e-store revenues often come from distant customers and represent “e-surplus” sales. How are these e-sales revenues included in the leakage analysis? How do leakage analysts know which e-sales come from within the B&M store’s traditional trade area from those that come from beyond it?

A growing number of retail sales are “click and collect” transactions that involve ordering online via a retailer’s server that probably is located hundreds of miles away and then picking up  the merchandise at the retailer’s local store. Are those transactions to be deemed leaked or “unleaked” sales? The local store’s involvement may be key to the sales transaction, though it may not logically be part of the monetary transaction. Would the sale have occurred if the local store were not there? If the answer is no, then somehow the role of the local shop has to be recognized in the analysis.

Vacancies, Store Closings and Openings, Changing Functions

A Word or Two About Vacancies. I fear that I’m very much an outlier, a contrarian, when it comes to downtown vacancies. While I don’t like vacant storefronts, my jockeys don’t always get in an uproar when I see them. Too often, they are not viewed from the proper perspective. Rule 1 for looking at vacancies should be to ask: where is the downtown on its revitalization arc? If it’s in the initial very troubled stages, then the prospects for recruiting really good retail tenants are not great, especially with today’s upheavals in the retail industry. Moreover, recruiting crappy tenants would be worse for the downtown’s revitalization effort than the empty shops. Also, at these early points in the revitalization process, an EDO’s scarce resources are probably better spent on working for improving the infrastructure and housing and reducing quality life issues such as the fear of crime,  than paying for very problematic efforts to recruit good retail tenants.

Rule 2 is don’t be snooty — look at pamper niche tenant prospects such as hair and nail salons, yoga and martial arts studios, etc., especially early in the revitalization process when their relatively low revenue needs and desire for low cost spaces can put them among the downtown’s best tenant prospects.

I take vacancies more seriously when the downtown is much further along on its revitalization arc. In these situations, Rule 3 is the locations of the vacancies are far more important than their number. Those that are in strategic locations such as on or near the district’s “100% corner” or near other strong assets will certainly need attention. A cluster of them is also significant and probably indicates the existence of an important underlying problem.

Rule 4 is that the downtown EDO should identify and address such underlying problems, otherwise any “fill the vacancies” recruitment program undertaken either by it or local commercial brokers will most likely yield paltry results.

In the mid-arc downtowns, Rule 5 is to determine if new downtown projects have raised landlord expectations about:

  • Their ability to attract national chains, even though they are looking for fewer and smaller spaces and have become much more finicky about their new locations.
  • Potential rental incomes to the point that their spaces are too pricey for their most likely tenant prospects, small independent merchants.

If either of the above is the case, then there’s a landlord problem, not a tenant prospect problem. This leads into Rule 6: as downtowns revitalize, erroneous landlord estimates of viable rent increases can result in more vacant spaces than diminished consumer retail demand or its associated reduced retailer demand for store spaces.

In the past, I argued that a vacancy rate of about 5% was the sweet spot for mid-arc downtowns. Some vacancies are necessary to allow for the tenant churn that can bring in new merchant blood and help keep the district vital. That still strikes me as an ideal goal. Many years ago, my real estate mentors taught me that vacancy rates above 10% indicated the existence of serious downtown problems that needed immediate identification and remediation. Well, these days, under the New Normal, it seems that a 10% vacancy rate is about average for retail spaces (3). Of course, I am not clear whether that statistic refers to all the spaces in shopping centers and malls or just to those allocated for retail tenants. Given that so many malls and shopping centers have saved themselves by bringing in non-retail tenants, I would say it probably is the former. One disturbing implication for downtowns is that, these days, a 10% storefront vacancy rate may not be all that bad, comparatively speaking. Even more unsettling for me have been the reports I’ve seen of downtown vacancy rates in the 10% to 20% range in some of our small and medium sized communities,  Another implication is that downtowns must look more to nonretail tenant prospects to fill their vacancies, but ones that are able to stimulate and reinforce pedestrian traffic on nearby sidewalks.

Because of Omni-Channel Marketing, B&M Retail is Not Going Away. One might expect that if the addressable retail markets for B&M chain stores have shrunk substantially, that lots of the stores would be closed. In fact, there have been a huge number that were closed –e.g., 7,000 just in 2017.  However, new shops are also opening and an accelerating number of them are by Internet-birthed retailers (4). For example, so far in 2019, there have been 1,674 retail chain store losings, but 1,380 store openings (5).

Today, successful retailers do not see B&M store customers as a different set from their e-store shoppers. Instead, they just see customers who they can individually reach through several channels, e.g., B&M shops, websites, social media, traditional media, etc. They know that while most consumers may still prefer shopping in B&M stores over e-stores: (6)

  • Convenience is an important driver of which shopping channel the consumer will select
  • Unless the B&M store provides an attractive shopping experience, it will not attract as many customers as its management might want.

B&M retail shops, under an omni-channel marketing strategy can play a number of functions, besides being a place where sales transactions occur, that can justify their existence:

  • SONY and Samsung, for example, have had important store locations that are nothing more than showrooms. Many other retailers use their shops as places where customers can experience the use of their merchandise. You can, for example, book a nap at a Casper Mattress Sleep Shop.
  • More and more large retailers are offering “click and collect” purchasing, e.g., Best Buy, Walmart, Amazon.
  • Some retailers are developing special store formats, e.g., Nordstrom Local, where they can provide extremely high levels of customer service to shoppers with a proven record of spending large sums in their stores.
  • Almost universally, the B&M store is seen as the venue where the retailer can best provide experiences that will strengthen their relationships with customers.
  • B&M stores also can generate website traffic. For retail chains, a new B&M store in a market area sparks “a 37 percent increase in overall traffic to that retailer’s website” by area residents. (7) “For emerging brands, new store openings drive an average 45 percent increase in web traffic following a store opening, according to ICSC research” (8).  Of course, web traffic does not mean web sales (see below).

Very importantly, B&M stores outperform e-stores in several very critical ways:

  • They have a much higher sales conversion rates (visitors who turn into actual buyers), averaging about 22.5% across all retail sectors, than the less that 3% for e-stores (9).
  • Merchandise return rates for e-stores are three to four times higher than for B&M stores, probably because e-shoppers cannot touch, feel, try on or otherwise experience the merchandise. Returns have become an enormous ball and chain on e-retailer profitability, while bad returns experiences are really ticking off e-shoppers (10).

Bottom Line: B&M retail stores are not going away, but there will be far fewer of them, they will occupy smaller spaces, and perform many new functions that justify their existence besides making sales transactions. How is your downtown planning on dealing with such a scenario?



2) ibid.

3) closures-are-expected-2019

4) Ibid.

5) ibid.

6)  . Pew surveys have had similar findings.


8) Ibid.

9) See:



Retail at the End of 2017: Apocalypse or Evolving Paradigm Shift

By N. David Milder


A spate of recent articles has appeared that talk about our nation’s retail apocalypse. There is even a new Wikipedia entry for it: . On the other hand, some important players, such as Brookfield Property Partners, Elliott Associates, and Third Point (see: have made significant contrarian investments in retail real estate development companies such as GGP and retailers such as Restoration Hardware. Moreover, while there have been many reports about numerous store closings, the number of store openings, though admittedly far fewer, are not insignificant. Additionally, the post-Great Recession years have seen major retailers such as Target, Best Buy, Marshalls, and Walmart enter dense urban ethnic areas in numbers previously unseen. That said, the growth of e-commerce has had, as widely noted, a strong disruptive impact on the retail industry. As has the behavior of Deliberate Consumers. Since the fate of the retail industry will likely have strong impacts on many downtowns, a year-end assessment of that industry seems like a fitting task for the Downtown Curmudgeon to undertake to see if we are in the midst of an apocalypse or a paradigm change. It may well be that we are in the midst of both since paradigm changes usually mean massive changes in old structures.

 Consumer Demand for Retail Goods and Shopping Behaviors

The Great Recession brought about large and fundamental changes in consumer behavior that rival the impacts of the Great Depression of the 1930s. It not only turned middle-income households into Deliberate Consumers, but also helped impeded the career climbs and earnings power of young Millennials, fostered far greater income inequality, and the emergence of a Permanent Underclass. Additionally, the Baby Boomers have aged, with consequent changes in their consumer behavior. Overall, consumer demand and behavior have changed significantly over the past decade and at the end of 2017, those changes are continuing to have big and lasting impacts on the retail industry.

Deliberate Consumers (DCs) In 2017, DCs are still alive, well, cautious about spending and value conscious. They now expect and search for bargains, an expectation that retailers have unhappily fostered and continue to reinforce. For example, a recent NREI newsletter reports that:  “Almost half of apparel sold online during the (Thanksgiving 2017) holiday season were marked down an average of 46 percent, according to research firm Edited (See: ) Though, DCs have more jobs and more confidence in the economy than they had in 2010 and probably a little more money in their pockets, they are not making retail purchases the way they did pre-2008. Consequently, where they are present, their cautious behaviors continue to create serious problems for brick and mortar GAFO retailers, unless they are targeting and catering to the DCs, e.g., the off-price operations. If your downtown’s trade area is dominated by middle-income households, then your retailers must deal with lots of DCs.

Affluent Shoppers. They are spending again, though with somewhat more caution about their purchases. About 30% of the luxury market sales are now discounts. Where they are present, retailers are generally doing well, especially those in malls and large successful downtowns that have lots of expensive condos, office workers, and foreign tourists. Retailers still feel confident about being successful if they can capture affluent shoppers and retail property owners like to attract retailers that attract affluent shoppers. However, suburban downtowns that had heavily recruited what were once considered trophy apparel retailers, such as Ann Taylor, Chico’s, Talbots, Nine West, etc., are seeing vacancies as these chains closed many stores.

Affluent shoppers account for 40% to 50+% of the consumer expenditures in most retail product categories, but they account for only 20% or so of the households, so there are not a lot of them to go around.

Millennials. They are now the largest age group, but they are spending far less than the Boomers at comparable ages. They value experiences more than material things. They also have far less money to spend on retail than Boomers did at comparable ages. They are burdened by recession impacted slow career climbs and heavy student loans. A large number are still living with their parents. They feel very comfortable shopping online.

Overall, the Millennials are an age group that retailers must deal with, but getting significant sales from them is very challenging.

Baby Boomers. They are no longer the largest age cohort, but certainly the one with the most money. They are aging, with more and more of them approaching retirement age. Many are empty nesters. Though they may have more money than other age cohorts, their retail purchasing has shifted as they aged and their needs and wants changed. Many retailers, such as Chico’s, have been badly hurt as their Boomer customers “aged out.” Retailers need to be smarter about how to tap this very important market segment.

Ethnic Urban Shoppers.  Areas with these shoppers, such as The Bronx and Elmhurst in NYC, attracted new retailers in recent years. However, it isn’t the large numbers of low-income shoppers that is attracting the retailers, but the smaller, yet still very significant numbers of middle-income households that have been overlooked in past decades. Moreover, the members of these ethnic urban middle-income households very often have cars and exhibit a preference for car-oriented, suburban-type retail venues.

Low –Income Households. Walmart and Amazon are now battling the dollar store chains to capture their retail expenditures. For years, the dollar stores have been opening the most stores, while many other retailers were closing them because they were focused on this low-income market segment. And, in doing so, the dollar stores were cleaning Walmart’s clock. Walmart and Amazon have both now decided to also target this market segment.

However, these households probably account for less than 20% of the nation’s retail spending.

Shopping Behaviors and Preferences. Americans are shopping less at malls. According to Cushman and Wakefield, visits to shopping malls in the US declined by an astounding 50% between 2010 and 2013. A lot of the consumer demand disgorged by the malls is undoubtedly going to e-retailers. Pew Research Center, for example, found that the proportion of Americans shopping online had increased from 22% in 2000 to 79% in 2015 (Pew Research Center, December 2016, “Online Shopping and E-Commerce”.) However, as I have mentioned in past Downtown Curmudgeon posts, my field visits suggest that e-retailers are not capturing all of the malls’ disgorged sales revenues. Many savvy downtown merchants are also capturing significant shares in smaller communities where failed mall anchors were the older department stores such as Sears, JCPenny, and Kmart.

That Pew report had a number of other extremely important findings:

  • “Overall, 64% of Americans indicate that, all things being equal, they prefer buying from physical stores to buying online.” In addition, the Pew survey found that most online shoppers did not do so because it was more convenient than going to a physical store. Together, these two findings suggest that it is what brick and mortar retailers are failing to do in their stores that makes people prefer online shopping. In turn, that implies improving in-store experiences will bring back shoppers. How to do that is the real question facing many of today’s retailers. The old ways are failings. What are the new ways that can succeed?
  • “Respondents reported that price is often a far more important consideration than whether their purchases happen online or in a brick and mortar store.” This shows the impact of the DCs.
  • “Fully 65% of Americans indicate that when they need to make purchases they typically compare the price they can get in stores with the price they can get online and choose whichever option is cheapest.” This again shows the impact of the DCs.
  • “Roughly eight-in-ten Americans (82%) say they consult online ratings and reviews when buying something for the first time.” This is also DC behavior.

The strongest impact of the Internet may not be through e-commerce purchases, but how it has restructured the way Americans now shop. We now:

  • Research online before we shop. The Pew findings suggest that the Internet is now influencing 80+% of our first-time purchases.
  • Have more targeted visits to brick and mortar shops. We go directly to the merchandise we had previously researched online. With shoppers also being directed to retail destinations by their Internet searches, will the store’s location become less important? Far too little attention has been paid to this possibility.
  • Spend less time in retail stores, do far less in-store browsing and make fewer impulse purchases. This means that making retail shops and the downtowns “stickier” for shoppers is more important than ever. In turn, that probably translates into a need to have much stronger downtown Central Social District functions and for stores to offer more socially congenial experiences.

What physical stores need to do to compete more successfully with online competitors seems to be 1) offering competitive prices and 2) providing a socially congenial and appealing retail experience. Among many savvy retail experts and retail landlords, wrapping retail purchases in highly enjoyable experiences has become their new mantra. Successful malls are looking more and more like sucessful downtowns with major public spaces, loads of restaurants and entertainment venues, office spaces, hotels and lots of residential units.

The Rise of E-Commerce

True, more and more retail expenditures are going online. For example, according to the Census Bureau, in the first quarter of 2010, e-commerce accounted for 4.2% of the nation’s total retail sales, but by the third quarter of 2017, it had grown to 9.1%. Nonetheless, a critical point is that most retail dollars are still spent in brick and mortar stores, though online sales is where the growth is these days.

However, when we look at the table above, it is apparent that online sales have much higher capture rates for many types of retail merchandise and that online now dominates or probably has a good chance of soon dominating, many product categories. Sales for items once thought relatively difficult for online retailers to make are starting to gain traction. For example, online apparel sales were once thought hard to do because customers would want to touch and try on the merchandise. Similarly, furniture was once thought hard to sell online because it involved big and bulky items. However, both apparel and furniture have seen significant recent online sales growth in recent years and projections indicate the potential for even larger future growth.

The food and beverage sector has long been considered the toughest for e-merchants to penetrate, but the entry of Amazon, especially with its purchase of Whole Foods, has many experts reconsidering their previous positions.

Amazon’s Whole Foods and physical bookstore ventures are perhaps best understood as critical experiments in how online and physical store operations can be most efficiently and most profitably integrated. It’s not a question of whether the online or physical stores will have the most sales, but how a retailer can get the most sales by optimizing how they work together. Having an omnichannel approach to retail is now generally accepted as the right meta-strategy. How to properly and effectively implement that strategy is the real question now on the table. If no retailer succeeds, then we certainly will be in a genuine apocalypse, but if a pathfinder can succeed, others will follow, and then our retail industry will be operating under a new paradigm.

Finding the right path most likely will involve a lot of trial and error. It must be adaptable for very large and small operations. Finding it requires firms with a lot of money and patience. Amazon’s first physical bookstores are an interesting, if far from successful attempt at such an integration — and Amazon recognizes that. So far, Amazon has not attempted similar innovations at Whole Foods, though the lower prices it ushered in are definitely noticeable at check out and much appreciated.

Old Dogs Are Learning New Tricks. For many years industry commentators were concerned about the ability of major legacy retailers to develop successful online presences. Certainly, when it came to online sales, legacy retailers were only capturing small shares – about 13.1% in 2015, according to my calculations based on Census Bureau data. In recent years, however, Best Buy has made a substantial turn around and Walmart, through heavy investments in its own website as well as its purchases of major e-retailers such as Jet and Bonobos, has exhibited considerable online sales strength. Industry observers have also noted, that though Macy’s and Nordstrom’s are still facing tough headwinds on both the customer and financial fronts, their online capabilities have improved substantially.  Now, their major problems are really what is and is not happening inside their physical stores and how they will implement an effective omnichannel strategy.

Retailer Demand for Space

Store Closings. Since the onset of the Great Recession, a lot of media and analyst attention has focused, quite properly, on retail store closings. In 2017, eight years after that recession’s end, experts are estimating, based on company announcements, that there will be a very large number of stores closed by retail chains this year. The total may exceed 6,800. Among those that are hardest hit are the mall-type retail chains stores, especially those in apparel and the older department stores, e.g., Sears, Kmart, JCPennys, Bon-Ton and Macy’s. Save for Macy’s, most of the department store closings are in malls in smaller, less urban and less affluent locations such as Scotts Bluff, NE, and Rutland, VT.

Many middle-income areas have long been facing store closings because the retail market has been bifurcating into higher and lower income tiers for well over a decade. Wealthier communities – e.g., Westfield, NJ, and Wellesley, MA, have not been immune. To some degree, this was because some of the “trophy” retailers they had attracted were precisely the apparel chains that were most challenged nationally and closing lots of stores. But, it was also probably due to the changing behaviors of their trade area’s residents, who are shopping less often, seeing shopping less as recreation and more as a chore, and integrating the Internet more into their shopping routines.

Perhaps ccounter-intuitively, poor neighborhoods and small towns have been the least adversely impacted by the travails of the retail chain store closings, mostly because they seldom had any GAFO chain stores. Ironically, with the growth of online GAFO shopping, small town residents probably now have better retail choices than ever before, while their local retailers really do not compete that much with those online merchants.

Troubling still is the research by F&D Reports that suggests 33 retail chains with a total of 34,450 stores are now “vulnerable,” their futures distinctly uncertain. Among them are Ascena (whose store brands include Dress Barn, Maurice’s, Lane Bryant, Catherine’s, Ann Taylor and Loft), GNC, Toys R Us and Claire’s. (See:

Some observers argue that, currently,  the root problem of these troubled chains is not Internet competition or careful consumer spending, but that they “are overloaded with debt—often from leveraged buyouts led by private equity firms.” ( See: ).  Much of this debt was incurred at a time when the Federal Reserve was keeping interest rates close to zero, but those rates are expected to rise soon as those loans are due and when they will also have to compete with a lot of other borrowers looking to refinance their loans. This major threat seems to result more from incompetent business practices, than from e-commerce impacts.

Store Openings.  Less often discussed are the retail store openings. About 3,300 openings are expected in 2017. Dollar stores account for about half of those openings! Far fewer, but still meaningful numbers of openings are coming from off-pricers, other discounters, supermarkets, some auto parts chains (e.g., Auto Zone), some beauty retailers (e.g., Ulta and Sephora), the physical stores of online birthed retailers (e.g. Warby Parker), fast fashionistas (e.g., Zara), and high personal service boutique shops (e.g., Moda Operandi in Manhattan).

This is a key point: increasingly online birthed retailers are opening brick and mortar stores,  e.g., Amazon, Warby Parker, Bonobos, Rent the Runway, Athleta, etc. There are several reasons why they may want a brick and mortar store. For example, some evidence suggests that physical stores, in fact, may often be more profitable than a pure online retail operation and that conversion rates are higher among visitors to physical retail stores than among visitors to retail websites.

Simon Properties, the nation’s largest owner/operator of retail malls, has just created a new program to facilitate e-retailers being able to affordably open pop-up presences in its 300 malls (see ). Simon obviously sees e-retailers as the source of future successful retail tenants and is trying to ease their transition to brick and mortar operations. Simon is not alone in this. Savvy retail landlords across the nation are also focusing on these retail tenant prospects and all expect their numbers to grow.

Successful Malls.  Here is another key point that counters visions of a retail apocalypse: about 20% of the shopping malls are doing very well and they generate nearly three-fourths of mall revenues. They are “…located in affluent, highly populated markets that are tourist or economic hubs; and they’re owned by major mall operators who have the cash to make them even stronger.” (See: Malls still can be very profitable if they are in the right location and well-managed. 

Stronger Demand for Smaller Retail Spaces.  Retailers are not only looking for fewer spaces, but also for smaller spaces than they were 10 years ago—about 25% smaller. This reinforces the declining demand for retail space.  Online birthed retailers may reinforce this trend if, like Bonobos, they have no need for large amounts of onsite storage space for merchandise, since their customers’ physical store purchases are all shipped to their homes or workplaces from its distribution center, just like its online orders.

In the past, many downtowns have been unable to recruit high quality retailers because they lacked large enough spaces. That may not be as much of a  problem in the future when spaces of 1,500 SF to 2,500 SF are much more desirable to retailers. This means that these downtowns would have less need for mixed-use projects that has been the way many of them – e.g., Cranford, NJ – generated needed larger retail spaces.

The photo below is of a J. McLaughlin shop that opened in West Hartford, CT around 2014. It only occupies about 1,500 SF and its storefront is certainly less than 25 feet

wide. I found the shop surprisingly narrow inside. Two of the chain’s older stores that I’ve visited in the past in East Hampton, NY and Wellesley, MA are much bigger and their storefronts are much wider.

High Vacancy Rates and High Rents in Too Many Places.  To a very significant degree, the problem of high retail vacancy rates has less to do with the impacts of e-commerce or deliberate consumers and more to do with district success, landlord greed and miscalculations, and retail chain management deficiencies.

NYC is a good place to observe the vacancy problem. In Q3 of 2017, its economy, as Cushman & Wakefield noted, was doing pretty well:

“New York City’s economy continued to grow in the third quarter, although the pace slowed after an employment surge during the second quarter. A critical driver of retail activity, steady New York City tourism contributed to this growth as a record 60.3 million tourists visited the city last year, with 50.0 million visitors to the Times Square area alone.” (See:

Yet, in Manhattan’s 12 major submarket areas, the “availability rate” of retail space” – a.k.a. the vacancy rate – averaged 18%, with a low of 7% and a high of 32%. (See above table). Five of the 12 submarkets had availability rates above 20%. One cause for these vacancies is the large number of closures made by GAFO retail chains, but they cannot explain the wave of independent retailer departures.  An executive at a large Midtown Manhattan BID explained that many independent operators in his district have been driven out by unaffordable rents, and those that survived have been compelled to move from their desirable avenue locations to the less trafficked and less expensive street locations. Also, for many of the departing GAFO retailers, there were many store locations across the nation that their managements could select for closure, but they probably picked those in Manhattan because either the equation of how many sales dollars their very high rents were buying access to was no longer favorable or they could no longer afford to keep a nonperforming Manhattan store just for marketing reasons. Such calculations are perhaps enhanced when retail rents in these 12 market areas averaged $1,115 PSF and ranged from a low of $280 PSF to a high of $2,939 PSF.

In recent years, the city’s media have produced numerous stories about the growing vacancy rates in neighborhood commercial districts and the wholesale disappearance of small independent merchants. Vacancies even sparked an editorial in The New York Times (see: ). The independents usually closed when their leases came up for renewal in a district that was on the upswing and they could not afford the huge asked for increases that could reach as high as 625% ( see: Landlords asking for such increases from small merchants obviously wanted them out so they could attract national chains with much deeper pockets. Problems arose when the location and space demands of national GAFO chains declined substantially and their recruitment became far more difficult.

It is not hard to find similar stories in towns and cities of all sizes across the nation.

One frequent cause of the high rent increases is the successful revitalization or development of the commercial areas in which these storefronts are located. While district revitalization can understandably stimulate landlords to ask for increased rents, there is little evidence that many landlords can or want to calibrate their rent increases to what their current tenants can afford, even with their improved sales potentials, or that their conclusions about attracting far better paying retail chains were wise.

In some instances, abundant retail vacancies have been caused by local zoning that was incongruent with local market realities. In Arlington, VA, for example, zoning called for all new downtown residential buildings to have ground floor retail spaces. This requirement was probably motivated by an admirable desire to make or keep downtown streets pedestrian friendly. However, the development of too many mixed-use residential projects with street-level retail spaces meant that much more retail space was being developed than the market could absorb.

Elsewhere, in some downtown suburbs, developers have avidly built mixed-use residential projects with ground floor retail based on the expectation that the retail tenants would pay rents associated with newly constructed spaces. Unfortunately, creditworthy national chain tenants were slow to sign and independent merchants found the rents unaffordable. The result was unexpected long-term vacant storefronts and considerable lease concessions. While downtown revitalization advocates have long pushed for mixed-use residential/ground floor retail projects, it may be that in many downtowns that mix is no longer financially viable. Large downtown residential projects may be more cheaply and easily developed on sites within a few minutes walk of its main commercial corridor and still benefit district merchants.

Too Much Retail Space?  Of course, if a downtown has more retail space than the market can absorb, there will be plenty of vacancies. According to data from CoStar, total retail space in the U.S. totals about 13.0 billion square feet. That estimate includes both the total GLA in shopping centers and the GLA in other types of retail spaces, e.g., those in downtowns and neighborhood districts. (Source: CoStar Group, Inc. cited in With a current US population of 326.3 million, that translates into 39.8 SF of retail space per capita. Back in 2009, ICSC estimated that there was 14.2 billion SF of total retail space and 46.6 SF of retail space per capita. Some communities may have even more per capita retail space. For example, back in 2010, DANTH, Inc. estimated that Peoria, AZ had 58.7 SF of retail space per capita (see, page 7).

Since about 2010, there has been a growing acknowledgment among real estate experts that the US has far more per capita retail space than any other nation and far more than consumer sales can support. The recent downsizing of retail chain demand for new locations and the square footage of each store increases that surplus. As is happening with failing shopping centers and malls, much of today’s retail-prone spaces can be expected to be re-purposed in the coming years. In downtown after downtown, recent years have seen vacant retail spaces taken by professional and personal service operations. Many downtowns also have a significant number of “occupied vacancies” – occupied storefronts no longer generating rental incomes, but the landlords allow their tenants to stay on in the belief that it is easier to attract a new tenant to an occupied space. These spaces are usually in poor condition and in suboptimal locations.

Yet, new downtown developments continue to have significant retail components. Their rentals often mean that existing downtown retail tenants are being attracted, creating vacancies in older and harder to lease locations.

The US probably has had its surplus of retail-prone space for decades. What has helped hide it, or at least divert attention from it, was that there was usually significant demand for the new spaces. New retail spaces with attractive characteristics always draw tenants away from less attractive spaces, whether there is a space glut or not. Older spaces were allowed to follow an untended downward drift in condition and value — unless they became too publically noxious and then were made part of some revitalization effort. One might argue, that many downtowns, for years to come, will need to think about how they will reuse their problematic secondary and tertiary level retail spaces. Finding Central Social District uses for them – e.g., restaurants, ice cream shops, childcare and senior centers, crafts co-ops, small business co-worker spaces, etc. – would strengthen downtown visitation and use as well as the remaining retailers.

Keep Your Eye on This: The Uses of Retail Spaces Are Changing

As space uses change, the demand for retail spaces and where retailers want them located will also change.  In times past, retail shops were all brick and mortar and operated as places where:

  • Most of a retailer’s interactions with customers occurred
  • Customers obtained most of the information they could use about potential purchases
  • The retailer’ sales transactions occurred
  • Customers took delivery of their in-store purchases
  • In recent decades, there has been a distinct trend toward depersonalizing the shopper experience. Salespersons became harder and harder to find. Retailers are trying to do away with cashiers at check-out points, pushing self-checkouts.

Today, those physical stores are:

  • Increasingly used as distribution points for online purchases
  • Increasingly used as showrooms for online purchases
  • Starting to become places to deliver intense customer service to high-value customers that have been identified online. In luxury retailing, in particular, the personal touch that leads to customer pampering is still necessary and impossible to deliver electronically. Other retailers, especially independents, are catching on.
  • Starting to try to create a convenient, congenial and entertaining experience in which the traditional retail transaction – merchandise identification, selection, sale, and delivery – can be enveloped.
  • Less important for providing information about merchandise, but very important for providing experiences with the merchandise. The retailers’ online website and social media activities are taking on more of the information dissemination functions.
  • Less important as the sales transaction locations. By meshing with the stores’ online capabilities, customers are given more options, convenience, and freedom.
  • Most importantly, searching to integrate their uses and operations with their firm’s Internet operations

These changing uses of retail space raise some interesting questions that are now probably still unanswerable:

  • How will they impact the demand for physical space? Retailers like Bonobos may need less storage space, but other retailers who are responding to online sales may need more warehouse-type space for storage, wrapping, and shipping.
  • How will electronics infiltrate further into the in-store experience through such things as beacons and artificial intelligence?
  • If the customers of retail shops are being strongly directed to them by online information, then does that mean that their geographic locations become less important? They do not have as much need to be easily “found,” but they still will need to be easy to get to.
  • In the future, will retail stores with a different mix of uses still benefit as much from being close to high pedestrian flows? Will that depend on the uses in the mix?

It’s Time to Recognize the Incompetency of Too Many Owners/Managers of Retail Chains and Retail Properties

It is obvious that the very stressful position the retail industry now finds itself in was caused not only by changed consumer behaviors and the immense impact of the Internet, but also by the flagrant ineptitude of many of the people who owned or managed important retail chains and retail properties.

Prior to the Great Recession, too many retail chains followed a simple strategy: more stores. More stores meant more revenues. More revenues meant higher stock prices and happier shareholders. There was an amazing tolerance for sales cannibalization between their stores.  Macy’s, for example, had a very high percentage of its stores that were located within 10 miles of each other. Discussions about the US having too much retail space were already underway in the mid-1990s, but it took the Great Recession for industry leaders to take that issue seriously.

Also, prior to the Great Recession, many chains did not correctly understand how much space they needed for their stores. The post-recession downsizing undertaken by so many of them confirms that assertion.

When one hears that Related Properties is considering the purchase of the entire Neiman Marcus chain that is mired in debt, just to assure that one of its stores will open in Related’s huge new Hudson Yards project in Manhattan, one must seriously wonder about the competency of the firm’s management.

A recent article by Bloomberg noted that: “more chains are filing for bankruptcy and rated distressed than during the financial crisis.” Often these bankruptcies involve long-lived, well-known chains that were taken private, using a lot of debt, by private equity firms. (See: ).  

 Of course, Sears presents a sterling example of blundering retail management. Once the nation’s largest and strongest retailer, the anchor of many shopping centers and malls and the owner of several leading merchandise brands, e.g., Kenmore and Craftsman, today it is on the verge of total collapse. It is a sign of Sears one-time strength, that it is taking more than 20 years of decline for it to die off. It took a lot of incompetent managers to continue the bleed out that long.

The Bloomberg article also noted an associated and very troubling “increase in the number of delinquent loan payments by malls and shopping centers.” A wave of new mall and shopping center shutdowns may soon be upon us as the loans are not refinanced.

When very high prices are paid for downtown office or residential buildings with retail spaces or for downtown retail structures, the new owners will most likely have to ask for commensurately high retail rents. Such rents may be completely out of whack with what quality retailers, be they chains or independents, are prepared to pay. Across the nation, in major downtowns, many recent high-priced buildings were purchased by foreigners or investors with little or no knowledge about local real estate or retail markets. Of course, there were also experienced real estate companies that bought very high-priced buildings that have proved troublesome– e.g., Kushner’s purchase of the building at the Devil’s address,  666 Fifth Avenue in NYC. One wonders if and how these buyers took future retail rental revenues into consideration prior to their purchases? It is reasonable to suspect that this type of building owner accounts for a lot of the pressure for higher retail rents as well as store vacancies in Manhattan and other places.

Then there are the developers of mixed-use projects in suburban downtowns that expected to attract GAFO retail chains. However, prior to construction too many had not even a glimmer about who those retailers might be. After construction, they found that few, if any, were interested. These same developers were also likely to expect quality independent retailers would have little problem paying unsubsidized new construction rents.

Of course, thankfully, there also have been a lot of savvy retail merchants and real estate developers.

Looking Ahead

Retail stores are not going away, but they certainly will be changing. There probably will be fewer of them. Yet, the internet will not and cannot capture all retail activity.

The retail stores of the future probably will be quite different in their uses and ambiance and probably better than today’s. What they specifically will look like remains to be defined.

Sociologists and economists have long known that bringing about massive socio-economic changes require a strong crisis that severely weakens existing social and economic structures, thus easing the path for the innovations to appear and take hold. In my opinion, that is what is happening in the retail industry today. The old retail paradigm has been greatly weakened, but the new one is emerging in fits and starts. Many pieces of the new retail paradigm are already there. Effectively fitting them together remains the challenge.

The time for downtown leaders and stakeholders to start dealing with the emerging retail paradigm is now. Otherwise, their downtowns may be significantly injured or miss opportunities for real growth as the new retail paradigm unfolds. Retailers who do not keep up with the changes will lose. Not all that try to make changes will succeed, but those that don’t try will definitely be losers.

Retail markets in the future will be defined as much electronically as they are geographically. For many, many retailers in smaller and isolated communities that means great new opportunities as well as new risks.

I’m told that the Chinese word for crisis also means both danger and opportunity. A lot of retail commentators have been focusing on the danger our retail industry is in. More attention needs to be placed on the opportunities.