Retailers are opening more stores than closing, helped by cheap rents

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

From Ulta Beauty and Sephora, to Dick’s Sporting Goods, Five Below and TJ Maxx, companies are recovering from the Covid pandemic and dusting off expansion plans that were suspended. In the latest example, sportswear 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 was eventually liquidated, has a new owner looking to open stores before the 2021 holiday.

Retailers are eager to double down on brands that stayed strong during the pandemic-induced recession. Or they are excited to try new concepts that can attract new customers. And the less expensive rentals are making these opportunities irresistible.

So far this year, retailers in the US have announced 3,199 store openings and 2,548 closings, according to a Coresight Research tracking. The firm tracked a whopping 8,953 closings, along with just 3,298 openings, last year when the pandemic disrupted the retail industry and led to dozens of businesses out of business.

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

Following a tsunami of store closings in 2020, the retail real estate landscape is littered with vacancies. Shopping center and mall owners across the country are looking for tenants to fill that space quickly. Meanwhile, some retailers are more optimistic, having weathered the dark days of the pandemic. They seek to tap into a market in which they largely have more power over their owners when they sign new deals or bring negotiations to the table.

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

In major retail markets like Manhattan, which are often a mecca for tourists and commuters, trends have been especially pronounced. New York City retail rents fell to record lows last fall, dropping as much as 25% from 2019 levels, according to a semi-annual report from The Real Estate Board of New York.

And rents kept falling from the third quarter to the fourth. Average retail rents fell 1.6% quarter-over-quarter, said commercial real estate services firm JLL. The drop was more severe in certain markets: Along Lower Fifth Avenue from 42nd Street to 49th Street, for example, retail rents fell 7.6% quarter-over-quarter, JLL said. They fell 4.8% in the Madison Avenue district.

Meanwhile, empty storefronts remain a headache for homeowners. New York City retail real estate vacancy rates increased 21% year-over-year during the fourth quarter, according to a separate CBRE tracking.

“After the pandemic, we can go back to having exercise classes in stores and special shopping days,” said Goldenberg of Fabletics. “There is a true sense of community that comes from having a 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 discount retailers Burlington and Ross Stores, to discount supermarkets Aldi and Lidl. However, specialty retailers are in the mix, including Bath & Body Works from L Brands and Old Navy from Gap.

These retailers have been some of the best in the industry. During L Brands’ fourth quarter, for example, same-store sales at Bath & Body Works were up 22% year-over-year, while they were down 3% at their Victoria’s Secret business. At Gap, Old Navy’s same-store sales increased 7% during the fourth quarter, while its namesake brand posted a 6% drop. Dozens of Gap and Victoria’s Secret stores will close this year, as both companies invest in expanding their top brands.

Some real estate experts say the growth is reminiscent of what the industry witnessed coming out of the Great Recession. Retailers’ confidence shines as they map out more stores – both inside and outside of shopping malls.

“We are very excited about the shopping centers,” American Eagle Outfitters CEO Jay Schottenstein said during an earnings conference call in early March. “This is probably the best opportunity for us to choose new locations that are offered to us … at affordable rents for us.”

American Eagle plans to open about 60 locations this year under the Aerie banner, which is its brand of underwear and lingerie for teens and young women. Twenty-five to 30 of those new stores will be branded Offline by Aerie, an athleisure line that the company debuted last summer.

Part of the activity is a consequence of the experimentation that is spreading throughout the industry. Take Burlington stores as an example. It is opening a handful of smaller form factor prototypes that it hopes to scale in the future.

It’s planning to open 75 net new stores this year, 18 of which were previously planned 2020 openings that were delayed by the pandemic. About a third of the new stores will be smaller, at about 25,000 square feet, compared to their typical location of 50,000 to 80,000 square feet, the company said.

“This is going to be a great year for experimentation,” said Deborah Weinswig, founder and CEO of Coresight Research. “With landlords, there has always been this friction, as they have tried to extract as much rent as possible from tenants. Of course, that’s their job. But I think it actually hurt innovation.”

This year, Weinswig expects companies to test everything from smaller-format stores to so-called dark stores that serve solely as hubs for shoppers to pick up orders online. Experimentation could come in other ways as well. Nordstrom, for example, is testing live streaming shows that can be purchased.

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

However, not all retailers firmly believe that Americans will return to stores so quickly.

“In two years, when the market looks back on me, I will be seen as visionary or slow to change,” Lands’ End CEO Jerome Griffith said in an interview. Lands’ End currently has only 31 stores of its own and does not plan to increase that number but is channeling investments into e-commerce.

“I’m not optimistic about foot traffic in stores,” Griffith said. “People will be doing things, people will be out, but it will be things like going to restaurants and bars, going to the movies, going to sporting events, going to concerts. But I’m taking a very cautious approach in our stores.”

“We have stopped the expansion of the stores,” he said. “Whereas, two years ago, I would have told you that it will be a big part of our growth strategy.”