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APRIL 2011

Re-Tenanting Bankrupted Big Boxes
By Jeff Simonson

In many markets, the aftershocks of the recession continue, with the retail real estate sector still finding its way back. From 2008 through 2010, the overall U.S. retail vacancy rate rose from 6.8% to 11.0%, representing the return to the market of over 400 million square feet. While some of that space came in the form of stores with small footprints, such as the approximately 700 closing Blockbuster Video locations, a sizeable share of it was made up of closed big box retailers. And while the retail real estate market is clearly recovering, there are still signs of pain to come. Borders is currently working through the closure of 226 of its stores, with as many as 20 more on the way. And electronics retailer Best Buy, with a 16% quarterly drop in earnings, has hinted that it may close some under-performing locations. Market-watchers are now asking: How might these new closures affect the property owners? What factors will impact their ability to fill these empty spaces? What are the regional differences in speed of lease-ups? To investigate these questions, this white paper revisits four recently bankrupted retail chains: Circuit City, Linens ‘n Things, Mervyns and Gottschalks, which closed over 1,200 locations and vacated an estimated 56 million total square feet. A close look at the recovery timeline and trade area characteristics of these retailers’ individual locations may help predict the recovery behavior of future big box vacancies.
KEY FINDINGS › Bankrupt big box tenants in Sun Belt states leased up in a significantly shorter time than those in non-Sun Belt states—144 fewer days, on average. › Bankrupt big box vacancies did not cause a ripple effect across the centers in which they were located. Only 1.0% of additional vacant square footage was observed in those locations. › On average, vacated bankrupt big boxes leased up faster and more frequently in areas of higher population density.


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AVERAGE POPULATION DENSITY—A KEY PREDICTOR We evaluated a sample of 233 suburban store trade areas to look for differences in population trade area density between those vacated big box spaces that have been re-leased and those that are still empty. Retailer Circuit City Linens ’n Things Mervyns Gottschalks Total Geographic Footprint National National Regional Regional Former Locations 567 453 176 63 1,259 Sampled Locations 97 77 49 10 233

The results confirmed our assumption: average population density was higher around the locations where new retailers leased up the vacant big box space. As the chart below shows, slow- and fast-growing suburban trade areas alike shared the same characteristic: average population density was at least 20% larger at the big box locations which had been leased up again.
Average Population Density of Re-Tenanted Locations 2,718.3 2,994.9 2,885.7 2,151.5 2,675.9 Average Population Density of Still-Vacant Locations 2,248.0 2,494.5 2,190.1 1,771.7 2,148.8

Population Growth Category Slowest growing trade areas (2000-2010) 2nd slowest growing trade areas (2000-2010) 2nd fastest growing trade areas (2000-2010) Fastest growing trade areas (2000-2010) Average

% Difference 20.9% 20.1% 31.8% 21.4% 24.5%

All in all, nearly half (49%) of the vacated stores in the sample set found new tenants and released locations had a 24% higher average trade area population density.


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THE MOST DENSELY POPULATED TRADE AREAS LEASE UP 100 DAYS EARLIER There also appears to be a difference in timing across all the spaces that were eventually occupied. In the top 25% most densely populated trade areas, empty boxes found new tenants faster, averaging only 2.4 quarters to re-let the space. Meanwhile, the boxes in the less dense trade areas took an average of 3.4 quarters to find a lessee. That’s a difference of approximately one hundred days.
Population Density Category Least Densely Populated Trade Areas 2nd Least Densely Populated Trade Areas 2nd Most Densely Populated Trade Areas Most Densely Populated Trade Areas Average Average Quarters to Re-Tenant the Space 3.4 3.4 3.4 2.4 3.1

DRAMATIC DIFFERENCES IN THE SUN BELT STATES With their milder winters, many of America’s Sun Belt states have seen recent population growth in the form of newcomers from northern states, as well as Mexico. Like their weather, the characteristics of leasing velocity in Sun Belt states were markedly different from that of their northern neighbors. The difference between Sun Belt and non-Sun Belt locations in lease-up time is dramatic. America’s Sun Belt States.

› On average it took 144 fewer days for Sun Belt locations to re-lease vacated big box space compared to non-Sun Belt locations. › In the most densely populated trade areas, Sun Belt locations averaged 1.7 quarters to relet versus 4.4 for non-Sun Belt locations—a difference of roughly 243 days.
Average Quarters to Re-Tenant the Space Population Density Category Least Densely Populated Trade Areas 2nd Least Densely Populated Trade Areas 2nd Most Densely Populated Trade Areas Most Densely Populated Trade Areas Average Sun Belt 2.9 2.8 3.0 1.7 2.4 Non-Sun Belt 3.8 4.1 3.9 4.4 4.0


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FREESTANDING BIG BOXES FARED BETTER Property owners with freestanding boxes were able to lease up a larger percentage of the vacated space compared with their multi-tenant counterparts, but this freestanding advantage was rather small across all locations. › 53% of stand-alone spaces were re-tenanted, versus 46% of spaces in multi-tenant spaces. However, the story was quite different for freestanding boxes in the Sun Belt: › Over 60% of Sun Belt freestanding spaces were re-tenanted, compared with just 45% for non-Sun Belt freestanding boxes. The southwest concentration of Mervyns and their renegotiation of leases by Forever 21 and Kohl’s played a factor in this difference. We estimate that these two chains leased up approximately 3.6 million square feet of former Mervyns space. For those vacated spaces throughout the U.S. that did lease up again, freestanding locations leased up more quickly, on average: › Freestanding big boxes averaged 2.9 quarters to re-lease versus 3.6 quarters for multitenant spaces. Differences were more pronounced in Sun Belt states: Average Quarters to Re-Tenant the Space Location Type Freestanding Centers Sun Belt 2.1 3.1 Non-Sun Belt 3.9 4.2 Big Box Average 2.9 3.6


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WHEN BOXES WENT VACANT, FREESTANDING RENTS FELL FURTHER For the two-year period between Q1 2009 and January 2011, the real difference between the freestanding and multi-tenant units in our white paper was in the area of asking rental rates. › Freestanding properties fared the worst, with asking rents falling 36.9% versus just 12.8% for those in multi-tenanted locations.
Average Asking Rent at 2009 Q1 $19.46 $21.93 $19.36 $17.35 $16.76 $20.10 $23.56 $17.25 Average Asking Rent at End of Jan 2011 $15.97 $13.84 $16.88 $15.56 $15.27 $17.79 $19.37 $15.57

Category Big Box Sample* Freestanding Sample* Multi-Tenant Sample* Total Retail** Shopping Center** Power Center** Malls** General Retail**

Change in Rent -17.9% -36.9% -12.8% -10.3% -8.9% -11.5% -17.8% -9.7%

* Source: CoStar Database, end of January 2011. ** Source: CoStar Q4 2010 National Retail report.

While freestanding properties were more successful and quicker at re-tenanting space, it seems to have come at the expense of major rental rate decreases—36.9%. Multi-tenant landlords also saw a drop in asking rents—a 12.8% decline. LITTLE RIPPLE EFFECT OF BIG BOX VACANCY Retail centers are always at risk of a domino effect among vacating retailers. As one leaves, others may follow. But, there was a minimal increase in additional vacating tenants; this finding was consistent whether the center was located in the Sun Belt or not. › Vacancy rates at centers that lost at least one of the four big box retailers went on to hit an average peak of 26.2% vacancy. The vacated big box retail tenants themselves accounted for 20.0% of this total vacancy, meaning that just 1.0% of additional retail vacancy occurred after the big box vacated the center. › By January 2011, the average vacancy rate for the affected centers decreased to 17.3%— an improvement, but still more than triple the rate prior to when their big box spaces went dark. However, there is a significant and notable distinction across these locations. Centers that were able to re-let the big box space averaged a 5.4% vacancy rate, versus 28.5% for those centers where the vacated spaces remain empty.


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Impact of Big Box upon Center Vacancy
30 1.0% Additional Vacancies 25

Center Vacancy Rate (%)

20 15 10 5 0

20.0% Big Box Share of Vacancy 17.3%

5.2% One Quarter Prior to Big Box Vacancy

5.2% Average Peak Vacancy after Big Box Left Vacancy as of Jan. 2011

But this lack of additional vacancies does not mean that property owners escaped additional losses in rent. Anecdotally, many strong national co-tenants had negotiated co-tenancy clauses into their leases that reduce or eliminate their rent so long as the anchor big box remains vacant. UNCERTAIN PROSPECTS WHEN A BANKRUPT BIG BOX DOMINATED THE CENTER When the bankrupt big box comprised less than half of a center’s space, the likelihood of re-tenanting was approximately 40%. When the bankrupt big box comprised 60-90% of a center’s space, it took an average of seven quarters to fill the space—nearly double the overall average. Does the size of the bankrupt big box affect a center’s ability to find new tenants? Observers might assume that a greater number of tenants, each occupying a smaller percentage of the overall center, would protect an asset from a negative market. Too big a percentage could mean too big a risk. But how big is too big? And how big is the risk? › In centers where one of the four bankrupt big box tenants comprised less than half of the center’s space, the likelihood of re-tenanting the space was low, but fairly predictable (approximately 40%). › As the percentage of the center represented by a bankrupt big box increased, the re-let rates were much more volatile, ranging between 16% and 90%. › Also, in centers where the big box tenant occupied 60-90% of the total center space, it took an average of 7 quarters to refill the space—nearly double the average of 3.7 quarters. › Interestingly, centers with former big box tenants that occupied 41-50% of the total space by far had the fastest re-lease times, at slightly less than just one quarter.


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Average Quarters Required to Re-Tenant Space

% of Centers with Re-Tenanted Space

90 80 70 60 50 40 30 20 10 0





11-20% 21-30% 31-40% 41-50% 51-60% 61-70% 71-80% 81-90%



Big Box’s Share of Center Space (%)

THE SUN BELT FLIGHT TO POPULATION DENSITY Tenants in Sun Belt states are upgrading their trade areas in a fundamental way. While many factors weigh into what constitutes a quality retail site, population density appears to play a key role. In non-Sun Belt states, this trend is evident only in faster-growing areas. This ‘flight to quality’ started in urban retail and is now trickling out to suburban trade areas. Landlords in Sun Belt states were able to realize a quicker lease-up relative to their non-Sun Belt counterparts. In more densely populated areas this difference was dramatic. This difference in lease-up times between Sun Belt and non-Sun Belt locations holds relatively constant across the range of trade area density types. Additionally, for those southwest Mervyns freestanding landlords lucky enough to attract Kohl’s or a Forever 21, strong tenants were found quickly. In spite of these factors, continued low levels of new retail construction in the U.S. should amplify the competition for higher-grade space. Disparities in population density point to the fact that suburban retail markets can expect an uneven recovery, with winners and losers being decided on a location-by-location basis.


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FINDING SAFETY IN NUMBERS On the surface, the wide divergence in asking rents between stand-alone and multi-tenanted assets in this white paper suggests that having a portfolio of tenants allowed shopping center landlords to ride out the ripples caused by vacating big boxes and, to a degree, protect rents— even if it meant a longer time to re-lease the space. However, the damage may be obscured as many landlords with co-tenancy clauses had to wade through the big box fallout by conceding rent relief to smaller in-center tenants. On average, centers where big box tenants comprised less than 40% of the total space tended to be less volatile in terms of average time to re-let the space. As big box’s share of these centers grew, so did the volatility in the likelihood of filling the vacancy and time required.

PRINCIPAL AUTHOR: Jeff Simonson Senior Research Analyst | USA RESEARCH EDITOR: James Cook Director of Research | USA
EMAIL TEL +1 602 633 4601

EDITORIAL STAFF: Aaron Finkelstein Tim Santry

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Copyright © 2011 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.


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