Real Estate Rumble

NEW YORK — Retail bankruptcies, store closings and canceled expansion plans — largely caused by the downturn in the economy — have created a renters’ market for firms seeking new store spaces. It’s a reversal of more than four years of landlords and developers having the upper hand.

The recent spate of bankruptcies, including those of some big-box retailers that often take anchor spots in malls, are forcing landlords to scramble for alternatives, according to commercial real estate experts.

In addition to Chapter 11 reorganization filings by Boscov’s, Steve & Barry’s, Shoe Pavilion and Mervyn’s, more than a dozen well-known footwear and apparel retailers have announced store closings over the past two years, including Foot Locker, Genesco, Pacific Sunwear of California, Ann Taylor, Fashion Bug and home improvement retailer Home Base.

As a result, retailers are driving harder bargains with their landlords, said Dixie Walker, SVP at commercial real estate firm Grubb & Ellis Co., which represents both tenants and landlords. “The tenants are now carrying the club, and they’re using it,” he said.

But with the exception of a handful of store owners, few are opening new locations in today’s environment — even though they may be interested in deals.

“A lot of people are on hold [with expansion plans] nationwide,” said Matthew Winn, managing director of retail consulting for Cushman & Wakefield Inc.

Tenants vs. Landlords

Tenants are smart, and they know that in some cases, the success of a whole development hinges on a single destination store, Walker said. Nowadays, if there are no ready replacements for an anchor location, such as other expanding chains, the current big-box tenant is likely to negotiate a better deal with the mall landlord.

“Tenants have a much higher perch this time around,” said Walker. “It’s not the winds of change. It’s the change.”

Availability of capital plays a key role in whether a retailer can take advantage of the current real estate market, Winn noted. And with the credit market in shambles, expansion plans are taking a hit.

“In general, we’re coming off a phase where capital was cheap,” he said, which led to rapid growth for many retail chains. But now most retailers, and some landlords, are facing serious capital constraints.

Further, he added, with the general economic slowdown and softness in consumer spending, some chains have already tapped their lines of credit just to get through the holiday sales season.

Walker said he is aware of some retailers who are “flying under the radar” with unreported, serious financial problems, hoping that sales will improve before year-end. “It’s starting to happen. The first quarter of 2009, after the holiday rush, will be the tell-tale quarter,” said Walker, who declined to name which retailers are having financial problems. “In the first quarter, we’ll see a bigger impact.”

For stores that do have capital available, chain bankruptcies provide an opportunity to complete deals for multiple locations at rates not seen in years. “If you have capital, you can get more favorable lease rates,” Winn said.

For example, TJX Cos. (the parent of off-price chains T.J. Maxx, Marshalls and others) said earler this month it would use its financial might to snatch up real estate that becomes available as other businesses fail. “We are taking full advantage of the exceptional real estate deals out there,” Carol Meyrowitz, CEO of TJX, said on the firm’s quarterly conference call. “There is a great deal of shaking out going on in the retail landscape, which has already occurred and which we expect to continue. TJX is here for the long term and we plan to take full advantage of the opportunities presented to us.”

Target Corp. echoed similar sentiments. Last week, the company said it might grab a chunk of real estate that opens, perhaps from store closures. “Let me be crystal clear,” Doug Scovanner, CFO, told analysts on the firm’s third-quarter conference call. “If a block of stores came along better priced, that allowed us to enjoy robust returns, we would pursue that block of stores.”

At Shoe Carnival Inc., president and CEO Mark Lemond said on the firm’s third quarter conference call last Thursday that the company plans to capitalize on the soft real estate market. “While we recognize that the immediate profit builder of newly opened stores will be impacted by the current difficult economic environment, we remain committed to taking advantage of long-term real estate opportunities during a down retail market. We believe this is a prudent long-term strategy especially when those new store locations will backfill our existing under penetrated markets,” Lemond said.

And Douglas Probst, CFO at DSW Inc., told investors in August that in certain instances the company had been able to take advantage of the real estate market conditions. When tenants vacated premium locations or when landlords were wary about DSW leaving, for example, the chain had renegotiated for leases with better terms.

But, Probst said, there would be fewer good opportunities to open stores in the future because of the troubles threatening developers and the overall economy. While DSW has the capital available to expand, it won’t bow a new store if the location in question doesn’t meet the company’s standards, he said.

“We are not going to open in locations where we are the only ones there. We’re not going to open locations where we see other tenants pulling out,” Probst said on the firm’s second-quarter conference call. “We just have to be realistic with that. We’re still confident that new stores will work, but not in this particular period. The opportunities, we just don’t think [they’ll] be there.”
Winn, meanwhile, said he has talked recently with some cash-strapped retailers looking to free up capital by downsizing. Some are scaling back a particular location to 35,000 square feet from 50,000, for example, wringing the same level of retail sales from the smaller location and subletting the remaining space. Similarly, Toys R Us has said it plans to combine its space with its Babies R Us sister stores.

The Bankruptcy Effect

In the case of a retail chain bankruptcy, across-the-board store closings or vacancies for that chain are not always a given, said Steve Algermissen, a Cushman & Wakefield broker who focuses on West Coast retail deals. He noted that store closures tend to happen in waves.

For example, a bankruptcy could be tied up in court for a long period, or cheap leases held by a retail chain could be a valuable asset sold off in reorganization or liquidation, he said. Sometimes a retailer may buy up locations or leases just to keep them out of play for a competitor. Home Depot, for instance, is reportedly acquiring some 30 Home Base locations just to keep them away from competitor Lowe’s.

If big-box store spaces remain vacant long enough, Algermissen said, landlords may have to resort to a Plan B: divvying up the space into smaller store blocks. While that broadens the market for the types of retailers that can be brought in, a landlord would not move forward until it is comfortable several tenants are lined up.

Landlords, generally speaking, are also strapped for cash because of the economy, Algermissen said, which makes them less likely to invest in the construction costs of splitting up a big-box space, meaning adding walls, façades and bathrooms.

Michael Levin of Fameco Real Estate, which focuses on retail developments in the Philadelphia and New Jersey markets, said property owners these days are more willing to negotiate on issues such as co-tenancy requirements, construction allowances, space delivery conditions and property occupancy requirements.

But the troubles in the market haven’t been focused just on retailers. General Growth Properties Inc. recently warned in a filing with the Securities and Exchange Commission that it was at risk of bankruptcy, with $958 million in debt “that remains to be refinanced or extended” scheduled to mature by Dec. 1. In addition, more than $3 billion in debt will come due next year.

“Our potential inability to address our 2008 and 2009 debt maturities in a satisfactory fashion raises substantial doubts as to our ability to continue as a growing concern,” the firm said.

Nevertheless, the retail real estate market has been fairly resilient — so far. Algermissen said market weakness is appearing only in certain areas, largely suburban, fringe-area shopping centers. These secondary and tertiary centers — deemed so because of the quality of their tenants, parking, visibility or other location issues — have been more likely to end up with struggling retailers or “yesterday’s news” stores, Levin said.

Locations in so-called “A” malls are still filled because retailers that are expanding are doing so in a cautious manner and have raised the bar on what they’re looking for.

For instance, retailers that had 50 new stores planned are now looking at 30, or have cut back to 150 from a plan for 200, Levin said. But with their pipelines of prospective sites already set up, they can now be more selective and pick from the top of their lists.

A retailer such as Dick’s Sporting Goods, for example, can now choose from the best deals across the country because so many of the potential competitors for those deals have dropped out of the running, Levin said.

But most retailers are examining their growth plans and deciding that the sales figures and projected sales for their current stores don’t justify opening additional stores.

“People are not spending right now. They’re only buying the necessities,” said Kymberley Scalia, corporate director of marketing for Dallas-based Coyote Management, a firm that manages malls across the country.

As a result, retailers are holding off on negotiations until the first quarter of 2009, Scalia said. They are interested in looking at new space, but they’re not willing to pull the trigger right now.

That holds true especially for potential deals at shopping centers in the secondary markets, she said.

Still, the “A” centers in metropolitan areas should continue to get attention from retailers because those centers offer highly desirable spaces that may never have been available before.


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