Now What?
Sep 1, 2008 12:00 PM, By Kerri Linden
The headlines have been full of companies making announcements about store closings. A July report from ICSC projected that nearly 144,000 stores (about 36,000 per quarter) will close in 2008, up 7 percent from 2007, and the largest increase in at least 14 years. Retailers like Wilsons Leather, Geoffrey Beene outlets, Charming Shoppes stores, Pacific Sunwear, Ann Taylor and Talbot's are all among those slated for increased store closures. Linens 'n Things is in the process of shutting 120 stores and disposing of its leases and Starbucks is in the midst of closing 600 locations in the U.S. The list goes on.
The economy is behind much of the cutback activity, says Andy Graiser, co-president of New York-based DJM Realty, a consulting and disposition firm. “The market has cratered like I've never seen it,” he notes. “In 16 years I've never seen anything like it. And I don't see it ending anytime soon.” DJM's business is up 50 percent over last year, he says, and the firm can barely keep up with the number of dispositions the company has on its plate. “It means the economy is not in good shape. People just aren't shopping,” Graiser says.
And that's just where the story begins.
After a company has announced plans for store closings, the lawyers come out of the woodwork. Representatives for tenants and landlords knock heads to figure out issues such as how quickly the tenant will turn its space over, how much rent the tenant will pay out of its remaining obligation and who will decide — the tenant, the landlord or some third party — what the replacement tenant will be. When bankruptcies are involved the issue gets even trickier. Landlords have to join a long queue of creditors in an attempt to get paid back. Meanwhile, bankruptcy laws give retailers a certain amount of leeway for occupying space before it has to be turned over.
In most cases for a lease settlement in a store closure, retailers will sit down with the landlord and try to come to an agreement on a figure — usually a lump-sum payment that the retailer can afford. It all depends on the financial health of the retailer, says Graiser. An otherwise healthy retailer that may just be streamlining, like a Starbucks, should theoretically pay out several years worth of rent owed, he says. An unhealthy retailer, however, may only be able to pay a few months.
It also depends on how hard a landlord is willing to fight. In recent years, landlords have not been too strident when it comes to lease terminations. When business was booming, they were eager to get space back from struggling tenants because they knew they could turn it over easily. They could gut the store, sign a new lease and have a replacement lined up within six months, according to Ivan Friedman, president of New York-based RCS Real Estate Advisors.
Now, however, pickings are slim. It may take 18 months or more in the current leasing environment to fill some vacancies. Therefore, landlords have become much more aggressive about getting all they can out of a retailer that is closing its location. “If a space is going to stay empty for 12 to 18 months, the landlord may say, ‘I want two years’ rent instead of one,” Friedman says.
Many times the landlord can work with a troubled retailer, and allow it to pay reduced rent in order to avoid a vacancy, Graiser says, but it requires a mutual trust between both parties (see related story on p. 36). “You need to have full disclosure, and allow the landlord to look at the cash flow,” he says. “If you're forthcoming, the landlord will see the situation, and be willing to work something out.” And trust is a necessary ingredient if a retailer is backing out halfway through a long-term lease. Rarely does it work out that the retailer is ready to close as the lease is coming to an end.
Some major landlords are already feeling the pinch of lost occupancy, and are working to come out ahead. Indianapolis-based Simon Property Group sees store closings as opportunities to re-tenant the space, according to a company spokesperson. Simon lost 151,000 square feet of occupancy to bankruptcy in the first half of the year. “Let me just say, these are clearly challenging times, but we're positioned, well positioned to succeed,” said CEO David Simon on the company's second-quarter earnings call.
