Empty Stores Haunt Landlords as More Retailers Plan Cuts

Updated on
Vacant Borders Store
Empty stores from retailers that went out of business years ago, like this Borders store in Chicago's Beverly neighborhood, are dotting shopping centers across the country at a time the rest of the commercial real estate market has rebounded. Photographer: Tim Boyle/Bloomberg

A former Borders bookstore in Chicago’s Beverly neighborhood has sat empty for about four years, reviving last Halloween as a costume shop, then going dark again.

“When it was functioning as a Borders, it was a bustling Borders,” said Erin Ross, executive director of the 95th Street Beverly Hills Business Association, a trade group for business and property owners on the Chicago thoroughfare. “It’s just kind of a source of disappointment right now.”

Empty stores from retailers that went out of business years ago -- such as Borders Group Inc., which had big floor plans that are hard to fill -- are dotting shopping centers across the country at a time the rest of the commercial real estate market has rebounded. They’re now going to be joined by thousands of additional stores that will soon be vacant as retailers such as RadioShack Corp. file for bankruptcy and department-store operators including J.C. Penney Co. and Macy’s Inc. cut locations to save money.

Vacancies at U.S. regional malls rose to 8 percent in the fourth quarter from 7.9 percent a year earlier, partly because of Sears Holdings Corp. store closures, according to Reis Inc. The real estate recovery for neighborhood and community shopping centers has “remained at a snail’s pace,” the New York-based research firm said in January.

“Net demand is a fraction of what it was in the last cycle,” said Ryan McCullough, a senior real estate economist at Washington-based CoStar Group Inc. “Part of that reason is the store closures that have been happening and will be happening.”

Retail Cutbacks

Retailers and restaurateurs said last year they planned to close 5,483 locations, more than double the 2,592 in 2013, which was a record low, according to a report by the International Council of Shopping Centers and PNC Financial Services Group Inc. Last year’s total was the highest since 2010, according to the study.

Since then, retailers including apparel chains Wet Seal Inc. and Cache Inc. have filed for bankruptcy. Fort Worth, Texas-based RadioShack, with about 4,000 locations, sought protection from creditors on Feb. 5.

More troublesome for landlords than the relatively small Wet Seal and RadioShack locations are the spaces being abandoned by J.C. Penney and Macy’s. Replacement tenants will be difficult to find for those stores, with their large footprints. Macy’s Inc., based in Cincinnati, said in January that it will cut 14 of its approximately 790 Macy’s store locations within a few months. Plano, Texas-based J.C. Penney said it would close 40 stores around the U.S. this year.

‘Really Worried’

“That’s where I see the most pain,” said Garrick Brown, vice president of research for the western U.S. at commercial real estate brokerage DTZ in Sacramento, California. “What I’m really worried about is the department-store space.”

The toughest locations to fill will be such stores outside of thriving retail districts, according to Kris Cooper, a broker at Jones Lang LaSalle Inc.

“There is no easy answer in a tertiary market for a 100,000-square-foot Penney’s box that’s vacant,” Cooper, who handles retail-property sales, said in a telephone interview. “It just takes patience.”

One store J.C. Penney plans to shutter is at Eastland Mall in Columbus, Ohio. Back in 2006, the mall, with more than 1 million square feet (93,000 square meters) of retail space, was valued at $60 million. The property was sold Thursday in an online auction for $9.25 million.

Turned Over

Eastland’s previous owner, Glimcher Realty Trust, turned it over to creditors last year in a deed in lieu of foreclosure. The mall has a vacancy rate of about 30 percent, according to a marketing document from Auction.com LLC, which conducted the sale.

To understand the challenge faced by the owners of empty department-store space, one need look no further than Borders stores like the one in Chicago that have sat vacant for years.

Shorewood Development Group bought the former Borders in the Beverly neighborhood, on Chicago’s south side, for $1.75 million in December 2013, according to county property records. The 25,000-square-foot building has 108 parking spaces and is near stores operated by home-improvement retailer Menard Inc. and Wal-Mart Stores Inc.’s Sam’s Club, according to a Cushman & Wakefield Inc. document that advertises the property to potential tenants.

Voicemails for Louis Schriber III, chief executive officer of Buffalo Grove, Illinois-based Shorewood, weren’t returned.

“People understand why it’s taking a long time,” said Ross, of the 95th Street Beverly Hills Business Association. “It was built to be Borders.”

Pasadena Store

A former Borders store on South Lake Avenue in Pasadena, California, has suffered a similar fate. That location was shuttered about four years ago and has been mostly empty since, with the exception of seasonal use as a Halloween shop, like the Chicago property.

The Pasadena property has three floors, including a large basement, with more than 41,000 square feet, limiting the number of potential tenants, said Matthew Sullivan, a managing director at Lee & Associates, which is marketing the store for sale. The building, in a “prime area of Pasadena,” was purchased through Auction.com a couple of years ago by a Chinese investor, Sullivan said, declining to identify the buyer.

The owner wants to lease or sell the building. There is no asking price, he said.

“It’s a little too big for everybody we’re working with,” Sullivan said. “If it was on one floor, it probably would’ve been leased or sold a long time ago.”

Yoga, Pizza

Far easier to fill will be spaces being abandoned by RadioShack. The locations range from about 2,500 to 3,500 square feet, according to Anjee Solanki, national director of retail services at property brokerage Colliers International. Such footprints can be used by mobile-phone stores, yoga studios and pizzerias.

The size of the RadioShack stores “opens up for a lot more options,” said Brown of brokerage DTZ.

RadioShack said its biggest shareholder, Standard General LP, submitted the winning offer for 1,743 stores in an auction that began March 23. RadioShack entered bankruptcy in February with a plan to have a Standard General affiliate take over as many as half of its stores in a co-branding arrangement with wireless carrier Sprint Corp. RadioShack’s leases also have attracted bidders including haircut chain Great Clips Inc. and video-game retailer GameStop Corp.

‘Marginal Effect’

The landlords who will feel the least pain from store closings announced this year are those with top-tier retail centers with little empty space. Pain is more likely for owners of so-called Class B and C properties already struggling with low occupancies and plentiful competition nearby.

“Retailers over-retail and cut back,” Marc Halle, manager of the Prudential Global Real Estate Fund, said in a telephone interview. “It’s going to hurt retail, but it hurts the B, C product. It has a marginal effect on A product.”

Real estate investment trusts will be able to largely shrug off this year’s store closures, with most large enough to experience little impact from the cutbacks, said Jason White, an analyst who follows shopping centers for research firm Green Street Advisors LLC. Also, publicly traded REITs own some of the best U.S. retail properties, meaning that finding tenants for newly empty space is rarely a problem, he said.

“For the REITs, this is a manageable level of square footage that is coming back to them in one form or another,” White said.

Those likely to suffer more are smaller landlords unable to spread their leasing risk among hundreds of properties, said Ryan Severino, senior economist at Reis.

“There are some centers that are going to struggle for a long time,” he said. “If not permanently.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE