March 16 - 2023
As demand for home furnishings and durable household goods skyrocketed during the pandemic, e-commerce giant Wayfair became profitable for the first time in 2020. But Wayfair has since fallen on tough times. After losing 5 million customers in 2022, net operating losses exceeded $1.3 billion. Wayfair has canceled plans for new fulfillment centers, shed much of its corporate workforce, and has estimated that it cannot keep burning cash at its current rate for much longer. A share of Wayfair’s stock now trades 63% below its value at the end of Q4 2019.
If Wayfair enters bankruptcy or worse - collapses entirely - what might that mean for all its current leased space in the industrial market?
This week, CompStak took a look at some of the key factors influencing furniture demand, and Wayfair’s extensive industrial portfolio.
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Typically, spending on durable goods (furniture, automobiles, kitchen appliances, and recreational equipment) declines significantly during periods of economic uncertainty. But the opposite occurred during the pandemic.
A report by the Federal Reserve Bank of Cleveland details two drivers behind the phenomenon:
Lockdowns and social distancing forced consumer spending away from services and toward durable goods directly
Increased fiscal stimulus payments led in part to more consumer spending on durable goods indirectly by increasing disposable incomes
Additional time at home and spending power drove direct demand for new fixtures such as home office furniture, kitchen goods, and storage containers. Coupled with physical retail closures, this created the perfect environment in which digitally-native furniture retailers like Wayfair thrived during the pandemic.
Drawing in millions of new customers, Wayfair became profitable for the first time in 2020. By 1Q 2021, as year-over-year change in spending on durable goods and furnishings peaked at +114%, so did shares of Wayfair’s stock, which rose as much as +548% year-over-year.
But now, spending on furniture in real dollars continues to flatline. While still up 21.4% over 4Q 2019, levels are down -4.6% from a year ago based on the most recent data available (4Q 2022). Wayfair’s stock price also continues to decline year-over-year at a stable rate, as it is down nearly 90% from its peak at the end of 1Q 2021, and down 63% from pre pandemic levels (at the end of 4Q 2019). Wayfair was once the darling of institutional investors, but now pension funds are shedding the stock, and hedge funds are shorting it.
One of the underlying drivers of furniture demand is new household formation. Over the past year, the number of single family homes authorized for construction has taken a dive. With mortgage rates near their 2008 highs (now 6.26%) and concerns about the economy growing, pending home sales have also plummeted - the National Association of Realtors’ Pending Home Sales Index is down more than 39 points from its most recent peak in October 2021.
Following a late 2019 dip, multi-family housing authorizations have climbed nearly every month since the beginning of the pandemic, reaching their peak in Jan 2023. But that’s not necessarily all good news for furniture retailers: as Baby Boomers downsize, their furniture supply is popping up on second-hand markets. Younger, less financially stable renters are opting to purchase that inexpensive used furniture in lieu of buying new from retailers, on or offline.
Regardless of potential collapse, Wayfair must make decisions about its space needs in a short period of time. Having leased more than 85% of space prior to the pandemic, many of its leases are now set to expire. According to CompStak’s data, more than 50% of Wayfair’s space will expire by Jan 2026 (in less than 3 years) and more than 75% will expire by Nov 2027 (in less than 5 years). And by March 2030, in just 7 years, 100% of Wayfair’s current space will have expired.
The 50% and 75% benchmarks coincide with major expirations in Los Angeles - Orange - Inland and New Jersey North & Central, Wayfair’s key hubs near the nation’s busiest ports.
According to CompStak’s data, Wayfair’s current leased space is locked in at cheaper rates than other industrial tenants are paying in the same markets for the most part. In the major markets where Wayfair has a presence, they are currently paying an average of $5.40/SF, which is more than 30% below the current rent being paid today by occupiers overall for these same markets. And Wayfair's current rent in place is more than 52% below the average starting rent for leases executed in these same markets in 2022 overall.
The same statistics are most noteworthy in New Jersey and Los Angeles/Orange County/Inland Empire industrial markets, where according to CompStak's data, more than 31% of Wayfair's leased industrial space is concentrated. The two markets are amongst competitive industrial markets nationwide with low vacancy and robust rent growth. Current rents being paid by other tenants are 36.5% and 101.1% higher than Wayfair’s current rent in New Jersey and Los Angeles/Orange County/Inland Empire respectively. Average starting rents in 2022 in those same markets exceeded Wayfair’s current in-place rent by 101.1% and 264.1% in those same markets.
Wayfair’s landlords have significant leverage. When leases come up for renewal, they could opt to charge Wayfair rent more in line with the market or find a more financially-stable tenant willing to do so. Notably, Wayfair has significant footprints at newer buildings and in some of the most competitive markets nationwide. Across Wayfair’s leased square footage, the average built year for Wayfair’s space is 2015 which is newer than the overall average in the same markets of a built year of 2000. Vast amounts of space expiring in the near term combined with market rents far above current in-place rents are an additional headache for a retail giant already tasked with reducing costs.
Wayfair’s challenges may grow further if economic headwinds like layoffs and rising interest rates continue to dampen consumer spending. Next week, the Federal Reserve will meet to decide on a potential ninth rate hike of the tightening cycle and the results may be a turning point for many companies like Wayfair that have been facing turbulence in recent months.
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