Expanding Retailers Begin to Look at Big-Box Spaces, but Supply Outstrips Demand
Jan 6, 2010 1:53 PM, By Elaine Misonzhnik
On the lookout
That being said, there are some tenants that are looking at empty big boxes as an attractive expansion opportunity. Many value and off-price retailers, including TJ Maxx, Marshalls and Dollar Tree, operate stores that are in the same 30,000-square-foot to 40,000-square-foot size range as the former Circuit City and CompUSA locations and are actively looking for new stores. (CompUSA was another electronics retailer that liquidated in the course of the recent recession). During TJX Companies’ third quarter conference calls with analysts on Nov. 18, President and CEO Carol Meyrowitz said the firm saw potential for 1,500 new stores portfolio-wide, not counting expansion into new countries. TJX plans to end 2010 with a net of 93 new stores.
Meanwhile, Dollar General, one of the largest discount retailers in the country, is on target to end fiscal year 2009 with 500 new stores and plans to open another 600 in fiscal 2010. Dollar General, which has just completed an IPO this November, has actually benefited from the recession, reporting double-digit same-store sales growth as U.S. consumers have become more price-sensitive.
Indianapolis-based regional electronics big-box chain hhgregg Inc. has taken advantage of market conditions to expand aggressively.
In addition, by the end of its fiscal 2009, on Jan. 31, discount chain Big Lots will open a net 22 new stores, some in former Linens ‘n Things boxes. And home improvement chain Lowe’s will open 64 new stores.
Meanwhile, some category killers, including Best Buy and Bed, Bath & Beyond have been accelerating expansion as well. During the second quarter, for example, Bed, Bath & Beyond opened nine namesake stores, three buybuy Baby stores and a Harmon Face Values store. Some of those stores have been helping to fill vacancies left by now defunct rivals. When Bed, Bath & Beyond opened a 41,000-square-foot location at Gateway Plaza in Vallejo, Calif. this November, it took over a former Linens ‘n Things spot that has been sitting vacant for almost a year.
In the second quarter of fiscal 2010, ended Aug. 29, Best Buy opened 12 Best Buy stores, nine Best Buy Mobile stores and one Pacific Sales store.
“Some of the stronger big-box retailers are probably in a position to start accelerating their expansion plans, given that real estate costs are lower and there are attractive opportunities that have arisen,” says Hottovy. “I don’t think we are going to see numbers like we have in the past few years, but category leaders like Dick’s Sporting Goods, PetSmart and Bed, Bath & Beyond can at least maintain store openings.”
Certain supermarket operators, including Tesco, Schnuck Markets and Jewel-Osco, have begun using big boxes to jump-start some of their smaller, grocery-centered concepts, as has Walmart. Last year, the discount operator launched a new Marketside grocery concept that averages 15,000-squaref-feet. So far, Walmart opened four such stores. Meanwhile, some traditional Walmart stores, which average approximately 107,000 square feet in size, can fit within larger big boxes. Overall as of Oct. 31, 2009, Walmart opened more than 50 net new stores in the U.S.
Some supermarkets have shown interest in larger spaces as well. For example, Elizabeth, N.J.-based ShopRite Supermarkets plans to open an 80,000-square-foot store in New Rochelle, N.Y. at the site of the former Home Depot Expo in the first quarter of 2010. The retailer has also agreed to take over a former Linens ‘n Things spot at Midway Shopping Center in Scarsdale, N.Y. ShopRite is interested in spaces ranging from 55,000 square feet to 85,000 square feet and often takes over second generation locations.
Discount rates
Given the abundance of available supply, these tenants drive hard bargains, the brokers note. To begin with, they want to sign shorter leases—typically for a 10-year term, with various early exit options, notes Mehran Foroughi, senior vice president with Colliers International, a commercial real estate services firm. In the past, many category killers would sign 20-year leases.
They also want lower rents—according to Marcus & Millichap and CoStar, average rents for big box space declined nearly 5 percent from the third quarter of 2008 to the third quarter of 2009, to $11.04 per square foot. In reality, however, landlords desperate to fill space are agreeing to lower rents by up to 30 percent, according to Spiegelman. And if the new tenants have enough cash to pay for the store build-out without a large tenant improvement allowance from the landlord, they are pretty much writing their own deal terms, adds Graiser.
“In those cases, they are able to drive tremendous deals because landlords don’t have the cash” for construction, Graiser says.
Meanwhile, in markets with weak retail real estate fundamentals and a huge pipeline of supply, discounts on rents can reach up to 50 percent compared to what tenants were willing to pay two years ago, says Kit Graski, senior vice president in the Las Vegas office of Voit Real Estate Services, a real estate services firm. The Las Vegas Valley market, for example, went from having one or two big boxes in 2007 to around 50 empty big box stores at the beginning of this year. About 10 of those, including larger boxes formerly occupied by Mervyns department stores and some that belonged to grocery operators, were picked off by Kohl’s and by regional Hispanic supermarket chains. Virtually none of the vacant Circuit City or Linens ‘n Things stores have been taken, according to Graski.
Graiser notes some of the boxes in the 30,000-square-foot to 50,000-square-foot range might end up being sub-divided and leased to smaller tenants or be converted to non-retail uses. But it will be a while before we see any major pick-up in demand from traditional big box operators.
“If it’s owned real estate, we are still seeing a good market for that, but most of it is leased real estate,” he says. “In the smaller markets, we are going to look at vacant Circuit City, Linens ‘n Things and [Sam] Goody [boxes] for up to five years.”
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