Borders Liquidation Adds to Headwinds Facing Retail Property

Borders to Add 6.3 Million Square Feet to Slow Retail Market
Pedestrians pass in front of a Borders Group Inc. bookstore in New York. Photographer: Scott Eells/Bloomberg

Borders Group Inc.’s liquidation will increase available U.S. retail space by as much as 6.3 million square feet (585,000 square meters), according to DJM Realty LLC., as the industry struggles with near-record vacancy rates and stagnant rents.

DJM Realty plans to auction 259 Borders leases in two separate sales, probably in August and September, said Andy Graiser, co-president of the Melville, New York-based property-consulting firm. That’s on top of about 225 stores the book retailer began closing after its February bankruptcy.

About 859 million square feet of U.S. store space is empty, according to CoStar Group Inc. Retailers have cut back amid online competition and a national unemployment rate of more than 9 percent. Borders’ liquidation, approved today by the judge overseeing its bankruptcy case, is the latest to add vacancies after more than a dozen national retailers went bust since the recession in 2008 and 2009.

“It’s another negative factor when we have an abundance of negative factors in the market,” Ryan Severino, a senior economist at real estate research firm Reis Inc., said in a telephone interview. “It’s adding to the headwinds that retail’s facing right now.”

Borders, which has 399 stores, hasn’t hired a firm to handle the disposition of the rest of its locations, which are smaller outlets averaging 1,300 square feet, said Mary Davis, a spokeswoman for the Ann Arbor, Michigan-based chain.

Increasing Vacancies

The bookseller’s stores are in shopping centers, malls and stand-alone locations. The vacancy rate at U.S. neighborhood and community shopping centers rose to 11 percent in the three months ended June 30, near the record of 11.1 percent set in 1990 and up from 10.9 percent, where it had stood since the second quarter of last year, New York-based Reis said July 8.

Shopping center owners’ asking rents in the second quarter fell to $19.03 a square foot from $19.07 a year earlier, the firm said. Effective rents dropped to an average $16.54 from $16.58. Regional mall vacancies rose to 9.3 percent, the highest since Reis began collecting that data in 2000.

Borders, which once had more than 1,000 locations, lost business as customers switched to e-readers such as Inc.’s Kindle, introduced in 2007. It failed to reach agreement with a bidder, Najafi Cos., on a plan to keep the chain running, and will start winding down its stores on July 22.

Liquidators Gordon Brothers Retail Partners LLC and Hilco Merchant Resources LLC bid for and won the right to sell the bookseller’s assets. DJM, a unit of Gordon Brothers Retail parent Gordon Brothers Group LLC, was hired to dispose of 259 Borders leases, the company said in a July 18 statement.

Will Lease ‘Well’

“Even though it’s a huge number of spaces being dumped on the market in bulk, given the quality of the locations I think they’ll lease up quite well,” John Bemis, director of leasing at Chicago-based commercial real estate brokerage Jones Lang LaSalle Inc., said in a telephone interview.

Dick’s Sporting Goods Inc., Best Buy Co. and Books-A-Million Inc. may be among the retailers interested in Borders sites, Bemis said.

Paula Baldwin, a spokeswoman for Richfield, Minnesota-based Best Buy, said the company doesn’t comment on its real estate plans. Anne-Marie Megela, director of investor relations for Dick’s in Coraopolis, Pennsylvania, and Terrance Finley, executive vice president at Birmingham, Alabama-based Books-A-Million, didn’t return telephone calls seeking comment.

Borders may sell up to 35 stores to Books-A-Million in a deal involving liquidators, Andrew Glenn, an attorney for Borders, said today. Books-A-Million has made an offer for about 21 super-stores and nine smaller stores and has an option on five more. The bankruptcy-court judge told Borders to get the offer from Books-A-Million in writing.

Centers With Borders

The Borders stores whose leases will be auctioned range in size from 10,000 square feet to 40,218 square feet, DJM said. The average size is about 25,000 square feet, according to Christopher Macke, senior real estate strategist for CoStar, a Washington-based property data company.

Macke estimates that vacancies at retail centers with a Borders location may rise to 18.8 percent should all the stores be shuttered. Before closures, the rate was about 4.2 percent.

Retailers that are growing may find the Borders locations attractive because they will be able to open new stores in four months to a year, said Graiser of DJM. The closures also will allow some landlords to redevelop their properties, he said.

Simon, General Growth

Shopping-center landlords may lose desirable customers because Borders shoppers tend to be affluent, Macke said. Property owners also may have difficulty filling some stores if they plan to subdivide them because the spaces are “fairly narrow and deep,” Macke said in a telephone interview.

Simon Property Group Inc., the largest U.S. mall owner, and General Growth Properties Inc., the second biggest, each have 23 Borders stores, according to data from Green Street Advisors Inc. of Newport Beach, California. Simon, based in Indianapolis, owns or has stakes in 263 million square feet in North America, Europe and Asia. Chicago-based General Growth’s portfolio totals almost 170 million square feet.

The case is In re Borders Group Inc., 11-10614, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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