Bargain store chains are flooding into North American malls and shopping centers like never before, upstaging old mainstays like J.C. Penney and Sears that are reeling from the one-two punch of an ailing economy and competition from online stores.
"We're seeing a seismic shift in retail shopping centers," said Garrick Brown, director of research at real estate firm Cassidy Turley. "The challenges of the weak economy are being replaced by the challenges of e-commerce."
The shift may reflect some consumer pain, but it has brought plenty of winners, too. Commercial real estate rents are rising, and many retailers, especially bargain chains, are in better shape than they have been since the Great Recession in 2008, analysts say. Shopping center vacancy rates in 60 major U.S. markets fell to 8.6 percent at the end of last year from 9.5 percent a year earlier, reflecting 38 million square feet of occupancy growth, according to Cassidy Turley research.
As a result, price appreciation among retail assets led all commercial property types in 2013, rising 23 percent, according to Moodys/RCA CPPI.
J.C. Penney Co Inc and Sears Holding Corp are retrenching and fighting for survival, raising a red flag for malls where, as anchor tenants, they draw foot traffic to nearby smaller stores.
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Meanwhile, Staples Inc and RadioShack Corp earlier this month hit the U.S. commercial real estate market with plans to close a combined 1,325 stores. Analysts said they were slow to react to declining foot traffic and the surging amount of consumer shopping moving to the Internet.
U.S. shopping center owners say they have had no reason for alarm. With new retail construction at historically low levels, they are getting help from a stable of discount retailers. Costco Wholesale Corp, T.J. Maxx, Marshalls, Dollar General, Nordstrom Rack and Ross Stores have been quick to fill vacancies.
Many of those stores are in great shape. Shares of bargain chain operators TJX Companies Inc and Dollar General Corp have risen 36 percent and 19 percent, respectively, over the past year as they open stores at a rapid clip.
The top five Dollar store brands together have opened an average 2,000 new stores each of the past three years with similar growth plans for this year, according to researchers at Cassidy Turley.
"Dollar stores have just had insane, insane levels of new growth," Brown said. Dollar General has more than 11,000 stores, with plans to open several hundred more in 2014. The chain has more stores than RadioShack and Staples combined, which have about 4,300 and 1,900, respectively.
"I see a lot of companies interested in the space that Staples would be exiting," said Peter Dixon, who runs the $1.1 billion Fidelity Select Retailing Portfolio. The fund's 1-year return of 30.37 percent beats 96 percent of peers while trouncing its benchmark by 12.5 percentage points, according to Morningstar Inc data.
Senior executives at Kimco Realty Corp agree with Dixon's assessment. Kimco, North America's largest owner and operator of neighborhood and community shopping centers, says it can absorb hits from consolidation in the office supply industry by signing up tenants such as T.J. Maxx and Marshalls, and specialty grocer Sprouts, for example.
TJX Cos, owner of T.J. Maxx and Marshalls and the operator of 3,200 stores, said cash outflows for property additions totaled $759 million for the nine months that ended November 2. Capital spending plans for fiscal 2014 will amount to as much as $950 million, compared to J.C. Penney's plan for about $300 million, according to their financial reports.
Kimco Chief Executive Dave Henry recently told analysts and investors at a Citi property conference that new store openings are at a five-year high.
"So even as these retailers consolidate, the demand for these bigger box (spaces) is good and strong, and rents are beginning to jump," Henry said at the March 3 conference.
In 2013 nearly 10,500 new retail stores opened, compared with about 2,600 closures, according to Factset research.