Circuit City’s Failed Auction Indicates Developing Excess Space Glut (12/23)
Dec 23, 2008 11:15 AM
Circuit City’s decision last week to cancel a planned auction of 154 leases due to lack of bidders could be another troublesome milestone for the rapidly deteriorating retail real estate industry. The market for excess space, once seen as a potential bright spot amid troubles in the sector, may already be becoming oversaturated.
The Richmond, Va.-based retailer, which filed for Chapter 11 bankruptcy protection on Nov. 10, instead signaled it may break the leases on 155 stores in all, representing 22 percent of the 715 domestic locations the chain operated as of Nov. 30. (One lease was not part of the planned auction). The portfolio of Circuit City stores slated for closure includes both stand-alone and in-line locations ranging in size from 15,280 square feet to 67,680 square feet, in 28 states with a large concentration of properties in Arizona, California and Georgia.
The auction had been slated for Dec. 18, but the company canceled the auction on the night before, after bankruptcy administrators informed it that there was not enough interest in the leases. Circuit City did not return calls for comment.
But the issue is much bigger than Circuit City’s leases. Many retailers are suffering sales declines, closing stores and slowing the pace of expansion. That’s creating a lot of excess space along with a shortage of potential replacements. While some segments of the retail industry are still growing—most notably discounters and grocers—there isn’t enough overall demand to absorb the space that’s coming to the market right now; especially in the mid-size big boxes Circuit City inhabits, notes Andy Graiser, co-president of DJM Realty, a Melville, N.Y.-based real estate disposition and restructuring firm that is handling Circuit City’s portfolio. As a result, failed auctions of excess retail space could become a common occurrence next year, according to Graiser.
“I think you just have to assume in most cases that if leases become available, it’s going to be a very, very, very dormant market,” says Graiser. “Which means landlords will have a lot of surplus for a while. It’s going to take a while to fill that space.”
This year, U.S. retailers have already announced 8,117 store closings, according to J.P. Morgan. In 2009, there could be twice as many store closings, according to Excess Space Retail Services, Inc, a Huntington Beach, Calif.-based real estate disposition and restructuring firm. (See “Store Closings Could Double in 2009.”
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