Retail Bankruptcies Putting Landlords In A Box

The past year has seen numerous high-profile bankruptcy filings among retailers, including Sports Authority, Sports Chalet, Aéropostale, Pacific Sunwear, Hancock Fabrics and American Apparel. Adding in the planned store closures by Walmart, Walgreens and Macy’s (among many others), major retail chain closures are at their highest level since 2010.

While multitenant retail centers and individual retail buildings have been in fairly high demand and trading at a pretty fast clip, the wave of bankruptcies is punishing larger retail centers across the country. For the most part, these multistore, large national platforms – generally located either in large malls or in big box retail formats – are owned by real estate investment trusts (REITs) or other institutions. Numbers from Bloomberg tell the story with mallfocused North American REITs down 10 percent in the past year overall and some down as much as 40 percent.

From a real estate perspective, the trend is causing serious headaches for the owners. Having a major tenant go into bankruptcy presents a financial challenge, while finding and recruiting a replacement tenant in such spaces presents a significant logistical one since the majority of them are purpose-built buildings with brand focused formats and floor plans.

Leaving a Big Hole in the Big Box

With the wave of closings, what will happen with the spaces vacated by larger retailers? In the case of some of the stronger players undergoing bankruptcy, such as Aéropostale or Pacific Sunwear, the plan is to reorganize and rework business plans, so the spaces are not in jeopardy yet.

Many of them, however, such as Sports Authority, Sports Chalet, Anna’s Linens, to name a few, resided in big-box or larger neighborhood retail centers, leaving a huge hole when they depart. Because of the difficulty of finding suitable new tenants, some landlords are choosing to repurpose those types of facilities. Rather than looking for another retailer, they convert into another type of space with a new concept, including schools or even churches. Aft er all, these aren’t properties you can list in the classified ads and there simply aren’t that many retailers with concepts that would seamlessly insert to fit the square footage.

A good example of re-tenanting and making malls more experiential is the old Harkins Theatre location at Scottsdale Fashion Square. While this tenant stayed at the mall, they moved to a new location. The mall owners brought in Scottsdale Desert Stages Theatre, a nonprofit theatrical group, with plans to create two theaters and several classrooms, and to install light and sound systems as part of the revamp. Other retail center owners have re-tenanted with schools, houses of worship and other creative uses in former big box tenant locations.

Where is Retail Headed?

There’s been a lot of discussion in the financial press and elsewhere about whether we still need stick-and-brick retail or if the future is destined to be buying online. The most recent Census Bureau estimate of U.S. retail e-commerce sales for the first quarter of 2016 was $92.8 billion (an increase of 3.7 percent from the previous quarter), while total retail sales for the first quarter of 2016 were estimated at $1,183.9 billion, down 0.2 percent. It’s too early to ring the death knell for in-person shopping, but safe to say we’re still in a state of flux.

If you’re looking for a silver lining among the dark clouds, it would be that we’re seeing a positive trend among local retailers, who are benefiting from “local first” initiatives. Given the choice, many consumers prefer to purchase from home-grown vendors, which is more meaningful and can impact the economy more sustainably. For retailers, there are definitely opportunities for launching new concepts.

Landlords, who in the past were courting national credit, are now looking for retailers to be a strong push. The impact of that can be seen most commonly in smaller or more local retail. Retail center owners who might have courted national tenants are instead giving local retailers and concepts more of a chance; that’s where the opportunity is. From the investor’s perspective, there’s more acceptance of local retailers who are performing strongly, which is giving rise to stronger local businesses and keeping more dollars in the community. With more retail buying occurring through Internet sales, retailers, shopping center and mall owners are now looking to build upon the “experience,” and not just provide an opportunity for merchandise display.  Beth Jo Zeitzer

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