Lower-End Concepts Gain Landlord’s Fancy

Discussion
Jan 04, 2010
Tom Ryan

By
Tom Ryan

With
a number of big box chains closing unproductive
locations and other chains liquidating amid the downturn, landlords
took a new shine to lower-priced formats in 2009.

In
California, sliding rents and vacancies helped many stores land locations
in the region they couldn’t tap a few years ago, according to an article
in the Los
Angeles Times
.
A study by Rizika found almost 100 empty big-box retail stores in Los
Angeles County, equaling to 4.5 million square feet. Most came from
the liquidations of Circuit City, Mervyns and Linens ‘n Things.

PetSmart
and Staples are introducing smaller stores to enable them to fit into
more affordable urban locations, according to Rizika. At the same time,
bargain women’s clothier Forever 21 moved into some former Mervyns
locations that are larger than its typical stores. Kohl’s as well as
Nordstrom Rack also moved into former Mervyns’ locations.

Retail
property expert Michael Wiener told the L.A.
Times
that
while upscale stores such as Nordstrom are still highly sought by landlords,
the less-pricey Kohl’s, Target and even dollar stores such as 99 Cents
Only are becoming more attractive targets.

“Deep
discounters have proliferated and will move into more attractive locations,” Mr.
Wiener said. “All of a sudden they are the darlings and can have the
pick of the litter.”

A
similar reshaping is happening in New York City, where rents have fallen
almost 50 percent on Madison Ave., according to an article in Crain’s
New York.
J.C.
Penney opened its first store in the city with a location next to Macy’s
on Herald Square, while Costco opened in Harlem. Nordstrom Rack signed
a lease for a location in Union Square, replacing a Virgin Records
store.

On
34th Street between Fifth and Seventh avenues, rents declined around
30 percent to near $400 a square foot, brokers told Crain’s.
The more affordable rents helped Aéropostale open its first
street-level store in the city on the block. Esprit and Geox also secured
more affordable leases on the strip.

Mr.
Wiener predicted that as many as 8,000 locations will close nationwide
as consumer spending remains tepid, retailers slow expansion, and bank
loans come due for property owners.

More
optimistically, mall landlord Sandy Sigal told the L.A.
Times
that
while “last year was panic and desperation” for tenants, with some
seeking relief from rent payments, the panic has eased and retailers
have become “more realistic.” He added, “Tenants are getting better
at learning how to survive in this market.”

Discussion
Questions: How are the low rents and vacancies reshaping the retail
landscape? Which channels (strip mall, regional mall, neighborhood
mall, etc.) will likely see the most reinvention due to current economic
realities?

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13 Comments on "Lower-End Concepts Gain Landlord’s Fancy"


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Dick Seesel
Guest
11 years 4 months ago

Stores like Forever 21, JCPenney and Kohl’s are well-positioned to be aggressive about taking over space from failed retailers like Mervyn’s and Linens n’ Things. As far as “trading down,” however, there is little difference between these stores’ target consumers…it’s really about better execution and better financing. The shift of square footage from upscale retailers (such as traditional department stores) to mass-appeal and big-box stores hardly began with the Great Recession…it’s a long-term market-share shift that began at least 25 years ago.

Steve Montgomery
Guest
11 years 4 months ago

As the consumer continues to seek “value” they continue to select stores such as Kohl’s, Target, etc. The result is that these chains are holding or gaining while their more expensive competitors falter and lose locations.

The issue for most of the value chains is whether they are able to adapt and be successful in modifying their format to fit the retail space vacated by others. If the answer is yes, then if they can prosper in a smaller or larger store, or in different types of retail locations, they will have a definite location advantage over their competitors. Because of the range of value retailers, it will likely impact all three mall formats mentioned–strip, neighborhood, and regional.

As the economy recovers, people will be slow to begin moving upscale for fear of false positive indicators. I expect that many people will then have formed a very strong shopping habit of value allowing these chains to continue to prosper.

Max Goldberg
Guest
11 years 4 months ago

All retail locations are being hit by the sagging economy and all will have to adjust to new realities. Landlords and tenants will have to learn to survive in changed/changing economic circumstances. This means being creative with store layouts and new formats.

Traditionally, large retailers will experiment with smaller stores in different formats in mall locations. Small retailers will have the opportunity to open in some locations that were heretofore prohibitively expensive. Niche stores run by entrepreneurs will be able to find space at better prices.

This is a scary, yet exciting time, for retail.

Bill Emerson
Guest
Bill Emerson
11 years 4 months ago

The plain fact is that there is much more selling square footage than there is consumer demand, a situation obviously worsened by the growth of the internet. There is debate as to when consumer spending will start to rise, but I don’t think anyone is anticipating a return to the levels seen in the “Roaring Zeros.”

As the article suggests, the big question is what to do with all the surplus space. There is opportunity for the lower/moderate price retailers to improve their location, but this is not incremental business. After some relocations, the same problem remains. The aging boomer population may provide an opportunity for some services to take space. In another of today’s discussions, there is also some opportunity for independent retailers to provide something new.

Even with these types of opportunities, the fact remains that there is simply too much space chasing too little demand.

Jonathan Marek
Guest
11 years 4 months ago

It’s a great time for new concepts. Especially for small format stores, where the overhead can be kept extremely low in this rent environment. I see it on a small scale right now with local businesses, but someone out there has the next big thing and is using this time to get the concept down.

Nikki Baird
Guest
Nikki Baird
11 years 4 months ago

In some parts of Denver, whole sections of strip malls lie vacant, and it’s these big box locations in particular that seem the most troublesome–no one big enough to fill an empty location without subdividing it in some way.

In the long run, certainly retail ingenuity will come up with concepts to fill in the blanks–there was a wave of “meal preparation” franchises that took over small box locations, and the latest fad in retail concept seems to be spice stores. But I don’t see a way out of big box locations without some kind of renovation to reconfigure the space. In the short term, however, it looks depressing, and landlords and other tenants can’t be too happy about it.

I wonder if this is a future reality driven by cross-channel? You don’t need a big box location if a large part of your selection is available online….

Gene Hoffman
Guest
Gene Hoffman
11 years 4 months ago

Lower rents and abandoned stores are the result of excessive exuberance by a large segment of the retail fraternity. It represents the ever-continuing, ever-changing, passing parade.

Now we will see smaller niche retailers such as Trader Joe’s and other innovative retailers aggressively filling the opening gaps. They will be successful primarily because they are currently unique and that represents “value” today.

In the decade after next yet another new breed of retailers will emerge to challenge today’s leaders and they too will continue to change the retail landscape. To wit, the retail world will continue to spin forever down the ringing grooves of change–with or without abandoned stores and lower rents–and the winners will be the masters of knowing how to go with the eddy and flow.

Ben Ball
Guest
11 years 4 months ago

“Affordability” is definitely a two-edged sword. Euphoria over the ability to afford a high-end location all too often fades into the realization that the location is now past it’s prime, regardless of who is there. As George Burns used to say “I wouldn’t want to belong to any club that would have me.”

Roger Saunders
Guest
11 years 4 months ago

Excess capacity (retail space), decreased demand (retailers needing less square footage), controlled spending by end consumer (spending less, and re-dividing expenditures between brick & mortar/internet), crippling debt load for a number of landlords (they will have to act in ways to capture new revenues.

That “perfect storm” can only mean lower rents for Commercial Real Estate. There will be, as always, winners and losers in this portion of the retail game.

Mark Johnson
Guest
Mark Johnson
11 years 4 months ago

Small, limber, local and responsive companies will flourish in 2010.

Eliott Olson
Guest
Eliott Olson
11 years 4 months ago

Ben:

Groucho Marx said it, not George Burns.

Say goodnight Gracie!
Goodnight Gracie!

Craig Sundstrom
Guest
11 years 4 months ago

Upon reading the headline–but before reading the article–I thought this was going to be about how upscale malls were “welcoming” tattoo parlors and t-shirt shops (and I was ready to scold someone for starting out the year with a truth stretttttttching claim). After having read the article, my reaction is much like Richard’s: not to speak ill of the dead, but Target, Costco or (even) FE21 doesn’t seem like a downgrade from Mervyn’s or L&T; Nordstrom Rack for Nordstrom obviously would be another matter, but I don’t see mention that has actually happened.

Ted Hurlbut
Guest
Ted Hurlbut
11 years 4 months ago

I see this as having an impact around the margins. For many of the stronger chains looking to take advantage of the many vacancies, they are all pretty well established geographically. There aren’t a whole lot of holes in their coverage that they need to fill.

Similarly, translating their format into either larger or smaller formats creates additional operational challenges. While these aren’t insurmountable, it likely alters the economics in a way that keeps this from becoming a broader trend.

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