The recent wave of big box bankruptcies is shaking up the industry. The leasing fallout has been significant and we sat down with two of Madison Marquette's Senior Vice Presidents of Leasing, Joe Morris in Philadelphia and Chuck Taylor in Florida. Although both are dealing with vacant boxes, regional distinctions are clearly evident.
Q: Are there enough existing substitute boxes to fill the vacancies of Circuit City, Linens n' Things and other recently liquidated big box concepts?
CT: No, there are not enough traditional retailers to fill the void. There are fewer retailers overall, especially in the large box category. To fill all the space we have to start looking at tenants that may be more local or regional. We need to seek alternatives such as health services, wellness centers, entertainment uses, or government uses such as libraries. We may also be on the cusp of a new evolution of retailers, perhaps the merging of two concepts such as electronics and home furnishings that could fill the void over time.
JM: Twelve months from now I think we will see that the majority of the noted spaces will be filled. Of course this prediction assumes that we do not have any more fallout. Unfortunately, this places a lot of tenants in the 20,000–40,000 square foot range out of the deal making arena for new developments in the pipeline. Many of the vacated spaces are in "A" locations and are available at bargain rates. It will be hard for developers to compete for the attention of desirable boxes that are the backbone of new development leasing.
Q: Is sub-dividing big box retail space a good alternative or are there other better remerchandising strategies?
JM: Often times it depends on the circumstances, such as configuration of the space and level of competition in the market. Fortunately, we have not seen many true "large box" spaces become available that warrant the need for sub-dividing. The ones that have become available have been taken over by retailers of the same size. An example of this would be Mervyn's portfolio whereby many of their spaces have been taken over by Kohl's.
The mid-size boxes can prove to be a little more challenging, and this seems to be where most of the fallout is occurring. While a 35,000–50,000 square foot space may have greater flexibility to break up, the 15,000–30,000 square foot spaces may prove to be more challenging if the depths of the spaces are deeper than 120 feet.
CT: In general, sub-dividing big box retail space is very expensive because of the physical costs. Demising space — adding various sprinkler systems, utility separation, additional bathrooms, separate HVAC units, etc., can compress the rent structure and is hard to justify. If the market can support alternative uses, that is almost always preferable to subdivision.
Q: What trends are you seeing in the kinds of large format retailers that are doing well and expanding?
CT: Discount boxes are doing well and expanding at the same time. As you go down the retailer line-up, those with higher price points are suffering while mid to low price point retailers are expanding. Customers are looking for more value for the dollar and finding it at such retailers as Kohl's, Wal-Mart, and TJ Maxx. They are benefiting right now from this difficult environment.
JM: We have been fortunate in the Northeast; with the exception of what I refer to as the "mid-sized boxes" sitting on the sideline, that there are many retailers of the large-box format actively seeking sites. We are seeing action from Wal-Mart, Kohl's, Costco, BJ's, who are pretty serious about making deals. We are also seeing action from some of the "smaller" large box tenants such as Staples, PETCO, PetSmart, and the health clubs.
Q: Will big boxes continue their push into urban areas?
JM: Many urban areas are incredibly underserved and certainly offer expanded horizons for retailers. The problem with this kind of development is that it is expensive; the majority of the "mid-size" boxes are unable to join these larger tenants because they are focused on the value opportunities that are being left behind by departing retailers. This will also change when the vacancies are cycled through and funds for new developments become more readily available.
CT: A recent conversation with Nordstrom Rack provided details on their vigorous plans for urban locations. Many of the target markets they wanted to expand in used to be completely untouchable and cost prohibitive. With the loss of junior boxes, rents have fallen and they are evaluating multiple opportunities to take advantage of the situation.
Q: How are category killers trending differently than department store or discount boxes? What are the drivers?
CT: Category killers seem to be trending similar to department stores with sales being down. Discount boxes are trending the other way with strong sales and value for the customer. People are really thinking of the value of their dollar. The increasing unemployment rate and concern for overall welfare in this economy are the primary drivers.
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