It's no secret the COVID-19 crisis has had a significant impact on retailers, and that includes well-established department stores that have long enjoyed their share of customer loyalty. Since the pandemic began, dozens of retailers have filed for bankruptcy, and while some are seeking to reorganize and find a way to operate profitably, others are going out of business.
Such is the case for Lord & Taylor, the U.S.'s oldest department store. After nearly 200 years, the bankrupt retailer recently announced it will be closing all of its stores as well as shutting down its website.
That's bad news for Lord & Taylor's loyal customer base, but it's even worse news for real estate investors who now need to worry about other department stores following suit.
Why Lord & Taylor's closure is such a blow
In-store shopping has been sluggish since before the pandemic began, and some retailers were making plans to close stores before anyone even heard of COVID-19.
In many ways, the online shopping experience is better for consumers and businesses alike. It's easy for customers to shop online, and during the pandemic, it's eliminated safety concerns. For retailers, fulfilling online orders is a lot cheaper than maintaining physical locations throughout the country. And with foot traffic in stores now slower, there's a good chance we'll see an uptick in store closures even after the pandemic runs its course.
Clearly, store closures are bad for real estate investors who put money into those spaces, and they're bad for retail REITs. But there's a difference between your run-of-the-mill store closure and department store closures.
Department stores have long been mall mainstays, and they're a major draw for customers -- more so than your typical store. Given that malls are already struggling, losing anchor retailers like Lord & Taylor could ultimately be their death knell. Not only do shoppers tend to flock to department stores, but once those spaces become vacant, they tend to be hard to fill. Department stores take up a lot of space and tend to span multiple levels, so replacing a retailer like Lord & Taylor is far from an easy task.
Now to be clear, Lord & Taylor was struggling well before the COVID-19 outbreak. Last year, it closed its 11-story flagship store on New York City's famed Fifth Avenue, which it owned for more than 100 years. Amazon (NASDAQ: AMZN) has actually purchased that space and is turning it into an office.
Will more department stores follow Lord & Taylor's lead?
Lord & Taylor may be shutting down permanently, but it's not the only major retailer closing locations. Macy's (NYSE: M) has plans to shutter over 100 stores, and bankrupt retailer J.C. Penney (OTC:J CPN.Q) intends to do the same.
While the demise of Lord & Taylor is clearly a blow to commercial real estate investors, this recent announcement is, unfortunately, indicative of a much larger impending trend. And that's something investors will need to brace for and find ways to work around.