Moving In
Sep 1, 2009 12:00 PM, By Elaine Misonzhnik
Grocers increasingly are taking over vacant big boxes.
Later this year, Seafood City, a California-based supermarket chain specializing in Asian cuisine, will open a new store in Concord, near San Francisco's Bay Area. In its new location, Seafood City will benefit from high visibility on Diamond Boulevard, with a trade population of 133,430 within a five-mile radius and average household incomes of $88,184 per year. But the supermarket chain won't be building a new store. Instead, it will take over a 61,833-square-foot former Circuit City box it recently bought from the Red Mountain Retail Group, a Santa Ana, Calif.-based retail developer, in a $163-per-square-foot transaction.
Meanwhile, over on the East Coast, Safeway Inc., a Pleasanton, Calif.-based supermarket operator, is looking into opening one of its new lifestyle stores in Towson, a community of 53,401 in suburban Baltimore, with a median household income of $64,313. In June, Bohler Engineering, a civil engineering firm with an office in Towson, reportedly filed for approval from Baltimore County to allow Safeway to move into a space formerly shared by bankrupt housewares retailer Linens 'n Things and computer seller CompUSA.
These are just a few examples of the growing trend of supermarket chains (along with discounters and some fitness clubs) taking over some of the vacant big boxes that have cropped up on the retail landscape because of mass closures by Circuit City, Linens 'n Things, CompUSA and other category killers. What the deals getting done have in common is that grocers are picking off the choice locations first — high-traffic sites on busy intersections and in dense, urban markets with higher than average incomes, older than average demographics and higher than average education levels.
Many retailers “went out of business and it had nothing to do with their locations and that left vacancies available in some very desirable areas,” according to David J. Livingston, a Waukesha, Wis.-based supermarket consultant.
The trend is benefiting landlords as well. The roster of typical big-box tenants continues to thin. Most big-box chains are not expanding and there are few new concepts on the horizon as others deal with bankruptcies, closures and liquidations. In this climate, grocery stores have become an attractive option.
For example, last year's liquidations of Circuit City and Linens 'n Things delivered close to 1,300 empty boxes to the market. Closings by chains including CompUSA and Home Depot left even more stores vacant. From the first quarter of 2008 to the first quarter of 2009, the vacancy rate in the big-box sector jumped 280 basis points, to 7.3 percent from 4.5 percent, according to research from Marcus & Millichap Real Estate Investment Services and the CoStar Group. At the same time, the absorption rate moved from negative 230,733 square feet to negative 1,057,687 square feet.
“Before, the landlords would have multiple parties knocking on their door. Now they are lucky to get [one] interested retailer,” notes Alvin Williams, principal of Excess Space Retail Services, a Huntington Beach, Calif.-based real estate disposition and lease restructuring firm. And today, that retailer has become a supermarket.
Everything old is new again
There are a number of reasons big boxes can become a great real estate opportunity for grocers. In addition to inheriting strong locations boasting good demographics, taking over existing buildings means grocers don't have to deal with the headaches of getting permits for new construction. For new stores that can take months, especially in the Northeast, where approval processes are notoriously lengthy.
Moreover, given today's market environment, supermarket chains can strike very favorable deal terms with landlords desperate to fill vacancies. According to the Marcus & Millichap and CoStar report, average rents for big-box spaces have fallen 4.5 percent from the first quarter of 2008 to the first quarter of 2009, to $11.30 per square foot. Anecdotally, some brokers say rents are even more attractive than that. In Dublin, Calif., an unidentified local grocery operator has been considering buying or leasing a 58,588-square-foot Circuit City, according to Deborah Perry, a broker in the Walnut Creek, Calif., office of Colliers International. That Circuit City space is expected to fetch between $14 per square foot and $16 per square foot — as much as 20 percent below market rate rents at the beginning of 2008.
Rents are not the only thing that landlords are willing to negotiate on. “More important with grocers are term options and specific use exclusives in the center,” says Williams. “The landlords are much more flexible. That's occurring in most major marketplaces, almost regardless of who you are. If you are a national credit tenant right now, there are all kinds of opportunities out there for you.”
However, there are also some challenges in retrofitting former big boxes for grocery use. Most major supermarket chains tend to have stores ranging from 45,000 square feet to 60,000 square feet — larger than some of the spaces on the market. For example, former Circuit City locations are in the 30,000-square-foot to 40,000-square-foot range and some are as small as 10,000 square feet. So grocers may have to adapt concepts or pass on spaces that don't fit existing prototype sizes. There is also the issue of parking. Supermarkets need a parking ratio of approximately 5 to 1, notes Perry, and big-box sites might have been designed to accommodate fewer cars than that.
For both of these reasons, many of the grocery stores that are going into former big-box locations are smaller concepts or offshoots of larger discounters that specialize in grocery. For example, Williams' firm has been helping British grocery operator Tesco's Fresh & Easy concept look for vacant boxes. Unlike traditional supermarkets, Fresh & Easy typically prefers 10,000-square-foot stores. (However, it is now considering some locations between 30,000 square feet and 40,000 square feet.
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