Store closures have been making headlines — from drugstores to restaurants and big box retailers. While some worry this is a sign of a slowing retail market, disposing of excess space quickly at the right price saves companies valuable time and money.
Closures are not limited to retailers that are struggling — healthy retailers and restaurants shutter locations where their prototype may have evolved or the demographic makeup of the neighborhood has shifted.
Mark Reeder, executive vice president at SRS Real Estate Partners, has provided disposition solutions for national retailers and restaurants for more than 30 years. He spoke to Shopping Center Business to offer insight on what retailers stand to gain in the current cycle.
SCB: Big Lots, Conn’s and Bed Bath & Beyond are a few of the retailers making headlines over the last year with store closures. Is this a sign of the decline of brick-and-mortar retail?
Reeder: When big box stores close, they create opportunities to reenergize and redevelop a property. This is especially important in a tight retail market where vacancy levels are at historic lows.
A lot of the real estate that has recently come on the market is already spoken for or is receiving multiple offers. As well-positioned properties become available, retailers are capitalizing on prime real estate in high-traffic areas. When Bed Bath & Beyond closed hundreds of stores last year, Burlington, Michaels and Havertys were just a few of the retailers that scooped up their vacant storefronts. Indoor pickleball courts, family entertainment centers and fitness centers also benefited.
Store closures can also be a positive step for healthy retailers that are disposing of underperforming locations or excess space, which can save millions of dollars. As an example, SRS worked with a national discount retailer to dispose of stores and sell pad sites in 34 states. More than 150 transactions resulted in over $400 million in revenue for the retailer.
Similarly, SRS has saved a national drugstore chain over $500 million through more than 400 lease buyouts and terminations, subleases and property sales resulting from closures.
SCB: How are large anchor retailers using pad carve-outs to maximize their real estate portfolios and increase foot traffic to their stores?
Reeder: Retail big boxes with large sites can carve out land from their parking lot to create a pad site which can be ground leased or sold to a complementary user, such as a bank or quick-serve restaurant (QSR).
For example, SRS has done 23 pad carve-outs valued at more than $17 million for a national home improvement retailer and is working on additional locations around the country. Coffee shops, fast casual restaurants, automotive service users and convenience stores are examples of synergistic retailers that have helped to drive additional foot traffic.
SCB: Red Lobster is one notable restaurant chain we’ve heard a lot about recently. What can we expect to see as restaurant closures are announced?
Reeder: Older restaurant concepts that close can make way for exciting new concepts that create jobs and attract consumers to retail areas.
Some of those restaurants might get demolished to make way for a new national restaurant chain or may be repurposed as second-generation space for a local or regional restaurant concept. Raising Cane’s, Shake Shack and Chick-fil-A are just a few of the chains that are looking to expand.
Our work with a national casual dining chain to sell or lease older prototypes and underperforming locations has included over 100 transactions since 2005, which returned over $100 million to the company’s bottom line.
SCB: When it comes to finding the right formula, what are some of the tactics retailers employ to deal with surplus space?
Reeder: The first step in a solid plan is a valuation to understand the fair market value.
- Selling the property: This is a good option if the market is strong, and the occupier can find a buyer willing to pay a fair price to offset their book value and, in some instances, even benefit from appreciation.
- Lease buyout: Negotiating with the landlord to terminate the lease early can be an option, but often involves a financial penalty. Also, many landlords won’t proceed until there is another good tenant waiting in the wings.
- Adaptive reuse: Repurposing the space for a different use, like medical, entertainment or fitness to capitalize on current trends.
- Subleasing: Freeing up space to another tenant can generate income and reduce carrying costs. Having a space occupied and operating is also more beneficial to both the tenant paying rent and their landlord, because it cuts down on vandalism and keeps minor maintenance issues from becoming catastrophic repairs.
SCB: How can surplus disposition benefit retailers and what strategies should they employ to navigate this process effectively?
Reeder: Surplus disposition is an effective technique for retailers to maintain a high-performing real estate portfolio and it’s a healthy part of the real estate cycle. By carefully evaluating options and engaging experienced professionals, retailers can navigate the process effectively, free up resources for growth initiatives and, ultimately, strengthen their competitive edge in the ever-evolving retail landscape.
— This article was written in conjunction with SRS Real Estate Partners, a content partner of Shopping Center Business.