The Effects of Big-Box Downsizing on the Retail Side
Many CRE owners have been challenged by the recent trend of big-box anchor tenants downsizing their retail footprints. Investors and developers should be mindful of retailers' new store concepts, and be critical of building size and rent projections.
- Jun 06, 2012
By James Slusher,
Associate Director, Stan Johnson Co.
Reacting effectively to the trend among anchor tenants toward downsizing their footprints is a challenge facing many owners of retail real estate. Retailers like Best Buy, Circuit City, Sears, Staples, Office Depot and Office Max have closed stores or reduced their store size. Investors have to protect their income stream by keeping this empty space lit and functioning without upsetting covenants, conditions and restrictions in other tenants’ leases.
Dark space in a shopping center causes immediate dilution of the income stream even if the original tenant is still paying rent. Vacancy keeps customers away and hurts all tenants. A major concern for landlords who are dealing with vacant big box space is the co-tenancy clauses that might exist in other tenants’ leases. If the anchor tenant goes dark, the rents of the other tenants’ are usually adjusted or abated, since the traffic attracted by the anchor tenant is lost. Another co-tenancy restriction that might come into play is the re-leasing of vacant space to a retailer that would compete directly with an existing tenant.
Best Buy is the poster child for the most recent wave of big-box retailers that are downsizing. The retailer is closing 50 of its largest stores, some in key locations. They are moving away from the larger 60,000-square-foot big-box format, shifting to two other, much smaller models, such as Fresh & Easy Express or Best Buy Express. The list of Best Buy closures has been out for some time and owners of those spaces are dealing with the vacancies. However, other owners who rent to big box retailers should be aware of this situation and be proactive if it looks like one of their anchor tenants might close or downsize.
The pool of tenants looking for large blocks of space is shrinking. Jim’s California Auto Body is a regional player that requires large spaces; Crunch Fitness and L.A. Fitness can be expected to step up; Whole Foods has taken over several vacated Circuit City locations. Ordinarily, these tenants won’t require onerous improvements of the space. However, if you can’t attract tenants like those, an option is to divide a big box space for multiple users. Space division is not always easy, since narrow, deep spaces are usually not attractive to the consumer. Movie theatres like big blocks of space, but they’ll require considerable retrofitting.
Tenants of The Marketplace at Braintree in Massachusetts have shown ingenuity in reducing their space while avoiding darkness or vacancy. Staples’ presence there has been reduced by 2,500 square feet and the vacant space was subleased to GameStop, a video games vendor. Kmart has subleased 11,000 square feet to Ulta, a seller of beauty products and services.
Last year, at South Coast Plaza (Costa Mesa, Calif.), Forever 21, a clothing retailer, opened 43,000 sq. ft. of space within a Sears store, on two levels, for its concept store XXI Forever. The arrangement, says Sears, enhances the customer’s shopping experience and adds value for its shareholders, since XXI Forever’s offering of fashionable clothes at budget prices complements Sears’ presence in junior apparel.
Not all retailers are downsizing. Some supermarkets, for example, are demanding larger footprints. Thus, owners of a grocery-anchored shopping center might want to look at expansion possibilities.
Overall, we see a continuing trend to footprint reduction. Investors and developers should be mindful of retailers’ new store concepts, and be critical of building size and rent projections. Landlords should also maintain appropriate reserves for re-leasing costs such as commissions, tenant improvements and property maintenance in downtime.