Circuit City’s Failed Auction Indicates Developing Excess Space Glut (12/23)
Dec 23, 2008 11:15 AM
One of the issues that will affect the success of excess space auctions will be the rents the retailer vacating the space is paying. In Circuit City’s case, the chain was paying market rates, which in the current environment seem inflated, says Graiser. By year-end, retail rents nationally will have declined 3.6 percent from the same period in 2007, cites Property & Portfolio Research (PPR), a Boston-based real estate research and portfolio strategy firm. The fall will likely continue into 2009, when rents could drop an additional 5.6 percent, according to PPR. And, the firm predicts vacancies will rise to 17.3 percent. Its projections are culled from data for retail properties of all formats greater than 30,000 square feet in size across 54 markets in the United States.
The upshot of all this is that as retailers vacate space, much of it will revert back to landlords. In the past, many “fought like heck to get back their spaces,” says Matthew Bordwin, managing director and national co-head of the real estate services team in the Melville, N.Y. office of KPMG Corporate Finance LLC, a middle-market investment bank. “But in this market, a bad retail location is like a hot potato. Everybody says ‘You take it’ and nobody wants it.” In essence, the market has turned the typical situation on its head. When retailers shut stores in a booming market, they battled with landlords for control over the vacant space. Landlords could potentially re-lease the space at a higher rent. Meanwhile, for the retailer subleasing or selling vacant real estate could generate some ancillary income. Today, however, neither party seems to wants to deal with excess space.
As a result, landlords would be well-advised to hold onto existing tenants for as long as possible, says Al Williams, principal with Excess Space Retail Services. To help struggling tenants survive and prevent a rise in vacancies at their centers, landlords have already become much more open to granting rent concessions and modifying lease terms, note both Williams and Graiser.
Although getting rid of excess space has become increasingly difficult, some transactions are still closing. On Dec. 11, for example, department store operator Kohl’s Corp. and discount apparel seller Forever 21 joined forces to purchase 46 leases from department store chain Mervyns through a bankruptcy auction for approximately $6.3 million. Most of the leases averaged 80,000 square feet and had 20-year terms. However, unlike Circuit City’s leases, Mervyns’ featured rents that, in many cases, were one-fourth or one-fifth of the rates in their respective markets, says Graiser, whose firm advised Mervyns and Kohl’s in the transaction.
Mervyns still has more than 100 leases it needs to either sell or break. Additional bankruptcy auctions might help the chain find takers for some of those spaces, Bordwin says. But, he adds, the majority of them could go back to Mervyns’ landlords.
--Elaine Misonzhnik
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