While retail closures are often viewed through the lens of consumer remorse or employment loss, the broader economic ramifications are far more significant. And as tariffs and consumer sentiment weigh heavily on consumer spending, it’s a good time to look closely at retail closures and their local impacts. Recent research broke new ground on this subject, measuring long-term impacts after big-box stores were shuttered. In those cases the negative spillover effects often seem to fester, lasting years and getting worse over time.²

Among the findings are the additional closings of nearby employers and retailers: When a big-box store shutters unexpectedly, 8% of all commercial establishments within a 0.1-mile radius subsequently close, with a 3% closure rate between 0.1 and 0.3 miles. Critically, these measured effects persisted at least eight years (the study’s length) after a store’s closing.

Importantly, these “establishments” extend beyond retail, encompassing service providers and office-based businesses—evidence of a broader commercial contraction, “consistent with a larger business decline than simply retail specific externalities.” Closed stores that remained vacant or were demolished saw the worst spillover effects, with more than 16% of close-by establishments closing.

Additionally, house prices within one mile of a closed store fall 1%, and 0.6% within one to two miles away, on average. The effect is even more pronounced, approaching a 4% decline, when the property remains vacant or is demolished.

The averages belie a wide range of potential outcomes; the local effects and the severity of those effects depend largely on what happens after the store closes, and this is where retail owners faced with closures should focus on optimizing outcomes.

Notably, negative effects are essentially neutralized when a big box store closes and is then replaced by a similar retail operator (e.g. Circuit City becomes Best Buy). Good move! In contrast, negative effects become significant when vacant stores convert to non-retail uses (e.g. office), and are worse when the vacancy persists or the building is demolished. The frequency of these scenarios is instructive for underwriting and repositioning strategies:

For context, the researchers looked at what happened after big bankruptcies, specifically the store closings after Circuit City, CompUSA, Mervyn’s, Linens ‘n Things and Borders each went BK. There were nearly 3,000 sites studied.

Interestingly, the type of retail that closed matters. Department stores that sell general merchandise and locate inside malls had large negative impacts on nearby businesses “which rely heavily on foot traffic.” More specialist retailers - Borders and Linens n’ Things - had fewer negative externalities on average when they closed.

In our experience a fair amount of retail space has been built that probably would not have been but for collective support from a diverse set of stakeholders. Nearby homeowners often like having the convenience and a so-called third space nearby, and close-by retail has been shown to improve home prices. Urban planners like it because it drives neighborhood vitality and local economic activity. And municipalities like it (sometimes too much) for tax revenue. An example is the often-mandated first-floor retail in mixed-use projects, irrespective of long-term viability or market demand.

But none of those retail cheerleaders have to bear the fiduciary responsibility of ownership. As real estate investors we know retail is a riskier asset class, which is no surprise considering its success is tied to unpredictable factors far from the owner’s control: the quality of a store operator, consumer preferences and incomes, nearby competition, e-commerce, etc.

Given all that, in today’s challenging economic climate, this study should be particularly instructive for investors across asset classes operating in sub-markets with significant retail exposure, because the spillover effects of retail closures can impact everyone nearby, from employers to residents. In other words it highlights a heightened need to examine the health and risk profile of local anchor retail tenants prior to investment decisions.

The Rake

Three good articles.

• College Towns Enrollment Decline Reshapes Local Economies - CRE Daily

  College towns face economic strain as declining enrollment impacts universities, local businesses, and housing markets.

• One Congress Office Refi Underscores the Growing Appeal of SASB Loans - GlobeSt.

  SASB loans are becoming a preferred option for high-quality commercial properties, signaling investor confidence in trophy assets despite a challenging office market.

• The Price Drops & Gains in 33 of the Largest Housing Markets - Wolf Street

  The latest analysis on U.S. housing markets providing a market-by-market breakdown of price trends across 33 major metros.

The Harvesters

Someone making real estate interesting. They don't pay us for this, unfortunately.

 Who: Bain Capital Real Estate

What: You likely know Bain already, but you may not know about their unique approach to investing, which deserves some limelight given its guided them through $7 billion of investments in more than 500 assets.

The Sparkle: Bain’s internal process is to develop myriad real estate investment theses based on secular trends, to research and test those theses until the best ideas remain, and then to proactively seek out the best operators and partners with whom to go deep. This contrasts with most investment firms who might claim to use proprietary value-uncovering analytics but in our opinion are often opportunistic, investing in the best individual deals they see. Hat tip to Bain and its willingness to bet on a data-driven, methodical investment process.

From the Back Forty

A little of what’s out there.

Check out Lightfoot. This new self-styled “smile machine” is a solar-powered electric scooter with a twist - it’s designed with significant, lockable storage space for groceries and a gym bag and more. Another twist, it comes with a buyback guarantee, a sales-friction-reducing move we don’t see often.

Link: https://lightfoot.solar/

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1  https://www.newsweek.com/stores-closing-after-being-taken-over-private-equity-firms-2037523

2  Zhou, Tingyu & Billings, Stephen & Rohlin, Shawn. (2024). The Death of Retail and Neighborhood Amenities. 10.2139/ssrn.4726128. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4726128