Retailers are opening more stores than they are closing, with the help of cheap rent

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

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 the expansion plans that have been suspended. In the most recent example, sportswear retailer Fabletics said on 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 ended up being liquidated, has a new owner who plans to open stores before the 2021 holiday.

Retailers are eager to double the brands that remained strong during the pandemic-induced recession. Or, they are excited to test new concepts that can bring in new customers. And cheaper rents are making these opportunities irresistible.

Year-to-date, retailers in the U.S. announced 3,199 store openings and 2,548 closings, according to a tracking by Coresight Research. The company tracked an impressive 8,953 closings, along with just 3,298 openings, last year when the pandemic affected the retail sector and bankrupted dozens of companies.

Looking further back, there were a total of 4,548 vacancies advertised by retailers in 2019 and 3,747 in 2018, Coresight said. So far, in 2021, the openings are already in pace to overcome each previous year, he said.

After a tsunami of store closings in 2020, the retail real estate scene is full of vacancies. Shopping center owners across the country are looking for tenants to quickly occupy that space. Meanwhile, some retailers are more optimistic, having survived the dark days of the pandemic. They seek to take advantage of a market in which they 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 get better conditions today than two years ago,” said Fabletics co-founder and CEO, Adam Goldenberg, in an interview.

In major retail markets like Manhattan – which is usually a mecca for tourists and business travelers – the trends have been especially pronounced. New York City’s retail rents fell to historic lows last fall, dropping up to 25% from 2019 levels, according to a semi-annual report by The Real Estate Board of New York.

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

Meanwhile, empty showcases remain a headache for homeowners. Vacancy rates for retail properties in New York City increased 21% year-over-year during the fourth quarter, according to a separate CBRE screening.

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

Many of the companies planning openings this year are focused on value. They range from Dollar General and Dollar Tree, to low-priced retailers Burlington and Ross Stores, and to discount retailers Aldi and Lidl. However, specialist retailers are in the mix, including L Brands’ Bath & Body Works and Gap’s Old Navy.

These retailers have had one of the best performances in the industry. During the fourth quarter of L Brands, for example, same-store sales at Bath & Body Works increased 22% year-over-year, while they fell 3% in its Victoria’s Secret business. At Gap, Old Navy same-store sales increased 7% during the fourth quarter, while its eponymous brand registered a 6% drop. Dozens of Gap and Victoria’s Secret stores will be closed this year, while the two companies invest in expanding their top brands.

Some real estate experts say the growth is reminiscent of what the industry witnessed after the Great Recession. Retailers’ confidence is shining as they plan more stores: inside and outside malls.

“We are very excited about the malls,” said American Eagle Outfitters chief executive Jay Schottenstein during a results conference call in early March. “This is probably the best opportunity for us to acquire new locations that are being offered … with affordable rentals for us.”

American Eagle is planning to open some 60 locations this year under the Aerie banner, which is its underwear and lingerie brand for teenagers and young women. Twenty-five to 30 of these new stores will have the Offline by Aerie brand, a sports line that the company debuted last summer.

Part of the activity is the result of experimentation that is spreading across the industry. See Burlington stores. He’s opening up a handful of smaller-format prototypes that he hopes to scale in the future.

He is planning to open 75 new net stores this year, 18 of which were openings previously planned for 2020, which were postponed by the pandemic. About a third of the new stores will be smaller, at around 25,000 square feet, against their typical 50,000 to 80,000 square foot location, the company said.

“This will be a great year for experimentation,” said Deborah Weinswig, founder and CEO of Coresight Research. “With the owners, there was always this friction, because they tried to get as much of the tenants’ rent as possible. Of course, this is their job. But I think it actually hindered innovation.”

This year, Weinswig expects companies to test everything from smaller format stores to so-called dark stores, which serve only as centers for customers to take orders online. Experimentation can also come in other ways. Nordstrom, for example, is testing programs that can be purchased and broadcast live.

“It’s a tenant market now,” said Perry Mandarino, head of restructuring and co-director of investment banking at B. Riley FBR. “I saw examples of short-term rentals with easy discounts and decent prices absolutely available.”

Still, not every retailer believes that Americans will return to stores as quickly.

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

“I’m not feeling well about pedestrian traffic in stores,” said Griffith. “People will be doing things, they will be out, but it will be things like going to restaurants and bars and going to the movies, going to sporting events, going to shows. But I am taking a very cautious approach in our stores.”

“We have stopped expanding the store,” he said. “Considering that, two years ago, I would say that this will be a big part of our growth strategy.”