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Retailers seize the moment to open stores as rents fall and vacant space abounds

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

From Ulta Beauty and Sephora, to Dick’s Sporting Goods, Five Below and TJ Maxx, businesses are rebounding the Covid pandemic and dusting off expansion plans that were put on hold. In the latest example, athletic apparel 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 ultimately liquidated, has a new owner that is looking to open stores ahead of the 2021 holidays.

The athletic apparel retailer Fabletics is planning to open two dozen stores in the U.S. this year, bringing its total to 74.

Source: Fabletics

Retailers are eager to double down on brands that remained strong throughout the pandemic-induced recession. Or, they’re excited to test fresh concepts that can bring in new customers. And less expensive rents are making these opportunities irresistible.

Year-to-date, retailers in the U.S. have announced 3,199 store openings and 2,548 closures, according to a tracking by Coresight Research. The firm tracked a whopping 8,953 closures, along with just 3,298 openings, last year, as the pandemic upended the retail industry and pushed dozens of businesses into bankruptcy.

Looking further 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 pace to top each year prior, it said.

Following a tsunami of store closures in 2020, the retail real estate landscape is fraught with vacancies. Mall and shopping center owners across the country are looking for tenants to fill that space quickly. Meanwhile, some retailers are more optimistic, having made it through the dark days of the pandemic. They’re looking to take advantage of a market where they largely hold more power over their landlords when they sign new deals or bring negotiations to the table.

“There’s more space available, and we’re able to get better terms today than two years ago,” Fabletics co-founder and CEO Adam Goldenberg said in an interview.

People walk by a sign displayed outside a retail space for lease as the city continues Phase 4 of re-opening following restrictions imposed to slow the spread of coronavirus on August 26, 2020 in New York City.

Noam Galai | Getty Images

In top retail markets like Manhattan — which typically are a mecca for tourists and office commuters — the trends have been especially pronounced. New York City retail rents tumbled to historic lows last fall, dropping as much as 25% from 2019 levels, according to a biannual report by The Real Estate Board of New York.

And rents were still dropping from the third quarter to the fourth. Average retail rents fell 1.6% quarter to quarter, commercial real estate services firm JLL said. 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 landlords. Vacancy rates for retail real estate in New York City rose 21% year over year during the fourth quarter, according to a separate tracking by CBRE.

“After the pandemic, we can go back to having workout classes in stores, and special shopping days,” Fabletics’ Goldenberg said. “There’s a real sense of community that comes from having a physical presence.”

Great Recession pattern repeats

Many of the companies that have planned for openings this year are focused on value. They range from Dollar General and Dollar Tree, to off-price retailers Burlington and Ross Stores, and the discount grocers Aldi and Lidl. However, specialty retailers are in the mix, including L Brands‘ Bath & Body Works and Gap‘s Old Navy.

These retailers have been some of the stronger performers 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 dropped 3% at its Victoria’s Secret business. At Gap, same-store sales for Old Navy were up 7% during the fourth quarter, while its namesake brand booked a 6% drop. Dozens of Gap and Victoria’s Secret stores will close this year, while both companies invest in expanding their superior brands.

Some real estate experts say the growth is reminiscent of what the industry witnessed coming out of the Great Recession. Retailers’ confidence is glowing as they plot more stores: Both inside and outside of malls.

“We’re very excited about the malls,” American Eagle Outfitters Chief Executive Jay Schottenstein said during an earnings conference call in early March. “This is probably the best opportunity for us to pick up new locations that we’re being offered … at affordable rents for us.”

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

Time to experiment

Some of the activity is an outgrowth of experimentation that is rippling through the industry. Take Burlington Stores. It is opening a handful of a smaller-format prototypes that it hopes to scale in the future.

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

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

This year, Weinswig expects companies will test everything from smaller-format shops to so-called dark stores that serve solely as hubs for shoppers to pick up online orders. Experimentation could come in other ways, too. Nordstrom, for example, is testing shoppable, livestreamed shows.

“It’s a tenant’s market right now,” said Perry Mandarino, head of restructuring and co-head of investment banking for B. Riley FBR. “I’ve seen examples of short-term leases with easy-outs, and decent pricing is absolutely available.”

Still, not every retailer is a big believer that Americans will return to stores so swiftly.

“In two years, as the market looks back on me, I’ll either be considered visionary, or slow to the switch,” Lands’ End CEO Jerome Griffith said in an interview. Lands’ End has just 31 of its own stores today, and doesn’t plan to grow that number, but instead is funneling investments into e-commerce.

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

“We’ve stopped store expansion,” he said. “Whereas, two years ago, I would’ve told you it’s going to be a big part of our growth strategy.”

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