“Radio Shack announced it will close up to 1,100 stores.”
“Staples said it will close 225 stores.”
Over-building of brick-and-mortar stores and online shopping alternatives in the last few years have created the perfect storm for retail real estate values. These two factors, coupled with deteriorating economic demand fundamentals, spell a rough seas warning for the long-term stability of convenience store real estate prices.
“The overall amount of retail space nationwide will drop between one-third and one-half within the next five to 10 years,” said Michael Burden, a principal with Excess Space Retail Services.
Staples, J.C. Penney, Sears and K-Mart are all closing stores. Staples says half of its sales are now online.
So far, the convenience store industry has been spared the affliction experienced by our sister street-retail formats where online shopping, such as Amazon.com, is taking away a larger share of sales, especially clothing and home electronics. Our salvation is simply because online shopping does not compete with convenience retail.
For the convenience industry, pretax profits per store have actually been growing since 2009. However, knock-on effects can happen for convenience retail real estate as traffic generators, such as shopping malls, strip centers and big-box retail, disappear from the landscape. Some locations will experience fewer shoppers driving the roads in front of what were once prime convenience store sites.
The Fundamentals of Population Growth
One of the fundamental economic drivers of demand for real estate is population growth. When population levels decline for a nation, region or city, real estate prices fall. Just look at Detroit. Motor City’s population was 2 million in the 1950s. Now, it is less than half that, at 714,000. The brutal aftermath in the city is foreclosed and abandoned real estate.
The long-term fundamentals for U.S. real estate do not look good. It takes 2.1 children per woman for a given generation to replace itself, and America’s births have been below replacement level since 2007. As of last year, a Centers for Disease Control analysis showed an American woman will give birth to an average of 1.88 children over her lifetime -- also a record low and below the replacement rate.
Many commentators have warned of the dark economic consequences of America’s slowing population growth; their alarm is over the looming shortage of young people that will enter the workforce. This has already happened in Japan, Europe and Russia, with a result of years of economic stagnation. Most of these commentators fail to mention that real estate prices will also suffer. Over the long term, inflation-adjusted prices for real estate follow population growth rates.
The Number of C-stores Has Grown Too Fast
Store growth in the United States has outpaced population growth every year since 1995. The average U.S. annual population growth rate for the last 20 years has been 0.94 percent, while the number of convenience stores in the country has grown by an average of 1.62 percent per year over the same period.
In other words, the number of c-stores has increased 72 percent faster than the population.
This has resulted in a drop of population-to-store ratios since the peak in 1994 of 2,626 persons per store (see above figure). Today, the number of persons per store is 2,104, a decline of 20 percent. The convenience industry has weathered this by successfully moving into higher margin foodservice sales. But even this survival strategy will reach a limit in the face of declining population.