Stories, trends, deal makers and breakers, investors and seekers. Read about PE investment deals, M&A, capital markets and business in general, right here!

Shopping Spaces

It’s a tale of two very different markets (at least) when it comes to the commercial real estate sector and more particularly the construction of new shopping centers.

It’s a tale of two very different markets (at least) when it comes to the commercial real estate sector and more particularly the construction of new shopping centers. In Asia the sector is booming, with a burgeoning pipeline of new construction, which as of 2015 totalled more than 41 million square meters. In the United States, the business is languishing, with excess capacity and an expanding roster of big box retailers that are closing locations or worse yet facing bankruptcy, which is creating more empty retail space.

China is at the epicentre of the shopping mall construction boom, accounting for two-thirds of the construction of new retail space globally. According to a recent report from CBRE, four cities in China – Chongqing, Shenzhen, Chengdu and Shanghai – all currently have more than three million square meters of shopping mall space under construction, with 30 active development projects under way in each city. If nothing else, it signals that the Chinese economy is finally steering new construction away from creating additional industrial capacity and redirecting it towards the consumer retail sector.

Shopping centre development remains active in other parts of Asia as well. Bangkok is particularly strong, with more than 1.7 million square meters of new retail space under construction. Retail space development in India also remains dynamic, with the DLF Mall, which is the largest recent retail project in the Asia Pacific market, coming on the market in New Delhi.

In sharp contrast the new construction boom in Asia, shopping centers in the U.S. market are facing a very different picture, with large retailers under mounting economic pressure. This year has already brought four major retail chains into bankruptcy, the latest reported victim being the clothing chain Aeropostale, with more than 800 store locations spread across North America. Retailer bankruptcies pose a huge headache for shopping malls, presenting mall owners with a sudden challenge of lease rejections, going-out-of-business sales and darkened locations. The retail sector as a hole accounts for one of the largest areas of financial distress in the U.S. economy, second only to the energy sector when it comes to defaults in 2015.

In addition to the growing ranks of U.S. retailers facing default and financial distress, there are many more who are trying to adapt to the current economic climate by simply cutting back on locations. Department stores and big box retailers such as Sears, Macy’s and J.C. Penney are all struggling to reduce their square footage, as consumers continue to shift spending increasingly online. According to a recent report in the Wall Street Journal, the commercial real estate consulting firm Green Street Advisors estimates that approximately 800 department stores across the U.S. may be targeted for closure over the next few years, which could represent as much as one fifth of anchor space in U.S. shopping malls. Closure of anchor tenants poses a particular problem for mall owners as a result of the reduced traffic flow.

So, it’s a far different story, from one side of the Pacific basin to the other, with a wave of new mall construction well underway in China and other leading Asian markets, compared to the prospects in United States, where shopping malls face a significant overhang of excess capacity and the likelihood, according to Green Street Advisors, that perhaps 15% of all U.S. malls will be closed or converted to non-retail purposes over the course of the coming decade.