The collapse of brick-and-mortar retail becomes a real-estate question.
Caught up in the middle of the brick-and-mortar retail meltdown, Macy’s announced wave after wave of store closings. The 100 store closings it announced in August 2016 included Macy’s Men’s store in San Francisco and its store at Stonestown Galleria in San Francisco. Macy’s owned the buildings of both of them. This will bring Macy’s store count in San Francisco from three to just one store.
That’s how bad the meltdown is!
Macy’s is symptomatic for the brick-and-mortar retail sector. There have been thousands of store closings across the US over the past two years. So what will happen to the buildings and malls when big anchor stores are shuttered? Other locations may not be so lucky – if that’s the right word – as the two Macy’s locations in San Francisco.
In January 2017, Macy’s sold its 280,000-square-foot store at Stonestown Galleria for $41 million to mall REIT General Growth Partners, since renamed GGP, whose shares have plunged 26% since the end of July 2016. According to the San Francisco Business Times, which has obtained the plans submitted for the project, GGP is planning to redevelop the store into something – again the scary words – different this time…
GGP is planning to subdivide the location into a multiplex cinema, a grocery store, and multiple smaller retail spaces and restaurants. So let’s see how easy it is going to be to make this work.
A multiplex cinema is a brick-and-mortar installation that competes with streaming videos, Netflix, Amazon, DVDs, bootleg versions, everyone and his dog, and other movie theaters.
According to The Numbers, which tracks data on the movie business:
- The number of actual movie tickets sold in the US peaked in 2002 (not a typo) at 1.577 billion tickets. By 2016, the number of tickets sold had dropped 18% to 1.301 billion.
- But ticket prices soared by 49% over the period, from an average of $5.81 in 2002 to $8.65 in 2016 (more in San Francisco).
- Due to higher ticket prices, ticket revenues rose 23% from $9.16 billion in 2002 to $11.29 billion in 2016. But even price increases haven’t been enough: since 2012, revenues are up only 1.9% in total. In 2017 so far, revenues are flat with 2016.
On a side note, this is precisely why companies, the Fed, and mainstream economists cited in the media clamor for more inflation: price increases allow companies to inflate revenues and profits even though they actually sell less. And consumers whose wages don’t keep up with those price increases, cut back and go to the movies less often but still pay more.
So the Stonestown’s future brick-and-mortar multiplex movie theater is going to face this environment of slowing ticket sales and relentless competition from online movie sales.
The future grocery store faces other dynamics that are tough and getting tougher: the entire grocery store sector is caught up in price war. Big German discounters Aldi and Lidl are expanding in US. Amazon is muscling into it via its purchase of Whole Foods. Online grocery sales are gradually gaining momentum. Yet adjusted for inflation, food sales in the US have been flat for the past six years.
And chain restaurants, the most likely type of restaurant tenant in a mall, are going through their own recession that has now lasted 15 months and may be structural.
So challenges abound for the future use of Macy’s old Stonestown store. Brick and mortar retail – whether clothes, movies, or groceries – is going to be tough.
The 263,000-square-foot eight-story building of Macy’s Men’s store faces a different fate. It’s in the Union Square area in the center of San Francisco, in a prime location. Five floors used to be occupied by the Men’s store. The top three floors are office space that was occupied by Macy’s West Coast headquarters, which was shut down in 2012. The office space has remained vacant ever since.
In November, Macy’s sold that building for $250 million to Blatteis & Schnur and Morgan Stanley Real Estate Investing. The deal closed in February. The property will be redeveloped into a mixed-use retail destination with updated architecture.
The new owners intend to redevelop the building into art galleries, high-end restaurants, and flagship retail – with Union Square being San Francisco’s flagship retail area. The upper floors will house office space. And as Bisnow put it, “A rooftop amenity with panoramic views also is under consideration.”
“We hope to create a must-visit experience where fashion, food and commerce come together within a multi-level, indoor/outdoor environment,” Blatteis & Schnur co-chairman Dan Blatteis said. They expect to complete the redevelopment in 2021. The area swarms with locals working in the area or using the BART station nearby, and with tourists itching to spend money – unlike Stonestown that only a few errant tourists might stumble across.
The fate of these two buildings shows how buildings can find a second life when big retailers shutter stores. But it won’t be easy, and it will only work for some locations. There are other Bay Area examples.
In 2014, Sears sold its six-story 85-year-old art-deco building in downtown Oakland for $25 million to Lane Partners, a Menlo Park real estate company, which sold it to Uber in 2015. Uber has started extensive renovations and planned to move its headquarters along with 2,000 to 3,000 employees from San Francisco to the remodeled building. These plans have now been scuttled. As of March, Uber might only move a couple of hundred people to the Sears building; the rest of the building will be leased to other companies.
These locations are in expensive densely populated areas. The property will always be valuable – though maybe less valuable than today. And these buildings will always find some use once redeveloped. But class B and C malls in outlying areas might not have that luxury. Their buildings may have to be torn down before the mall can be repurposed into something else, such as housing, stadiums, or overflow parking lots for car dealers that sit on too much inventory. Or vacant land, hoping for better days.
Investors who currently own those malls with an iffy future are losing the revenue stream as retail tenants shutter stores and go bankrupt to get out of their leases. Malls are highly leveraged. That debt typically comes due after ten years – much of it over the next few years. And if buildings have to be torn down, the land value alone might not be much of a consolation for the creditors that will end up with these properties.
Sears Canada goes bankrupt, closes over a quarter of its stores, lays off 2,900 people. Shareholders rue the day. Read… Sears Canada Melts Down