Big-Box Space Remains Hard to Fill

July 31, 2012 

Close to a year after Borders Group Inc. collapsed, commercial real estate in San Diego and suburban shopping centers still are struggling to fill the vacated big-box space—and to cope with changes in the way Americans shop. 

Many shopping centers that lost Borders after the chain announced its liquidation are suffering high vacancies, falling rents and even debt defaults.  

Values have been falling in particular for the suburban shopping centers that rely heavily on big-box stores and have been bearing the brunt of the impact from online retail competition. 

Take the case of the Regency Park Shopping Center, outside of Kansas City, Kan. The former Borders store there stayed shuttered for months, and when its landlord—Dallas-based real-estate investor Henry S. Miller Cos.—finally filled it with a Natural Grocers, the rent was “significantly lower,” said Greg Miller, a senior vice president.

By then Regency Park had defaulted on its $25 million mortgage. The center has a vacancy of 30%, and its value had declined to $9.3 million in December, from $32.8 million in 2006, according to loan data provided by Trepp LLC, a debt-analysis firm. 

“It’s been a two-steps-forward, one-step-back deal,” Mr. Miller said.

A new survey of 205 closed Borders stores shows that one-third are still vacant. Those stores that filled the former Borders space are leasing at rates roughly 30% lower on average than what Borders paid. 

Some landlords have been reluctant to, in effect, take the lower rents that retailers are offering to pay.  Now that they’re going on sitting vacant for roughly a year,  landlords will be a little more practical. 

Some popular malls and downtown shopping areas have been able to replace Borders without cutting rents thanks to their locations and appeal to residents and tourists. 

But many big-box centers that depended on stalwarts like Borders, Best Buy Co. and Office Max have suffered higher vacancy, weaker cash flows and other problems as these retailers have closed or shrunken stores.  San Diego commercial real estate leasing is experiencing the same problems. 

After the Oaks Square Shopping Center, in Gainesville, Fla., lost its Borders, other tenants demanded rent decreases to make up for the fact that their big-name neighbor had gone dark, according to Trepp. The landlord, Retail Property Group, replaced Borders early this year with shoe seller DSW Inc., DSW -11.34%but the servicer overseeing the center’s $14.6 million mortgage started foreclosure proceedings last February. Retail Property, which has sued the servicer in an effort to pay off its loan at a reduced amount, declined to comment. 

The vacancy problem is affecting far more than commercial real estate in San Diego.  Among those still looking to fill a Borders vacancy is the Watters Creek shopping center in the Dallas suburb of Allen, Texas. “We have a [tenant] looking at taking the entire thing, but we haven’t made a deal yet,” said Terry Montesi, chief executive of Watters Creek’s owner, Trademark Property Co. 

Some industry watchers believe that big-box centers are facing problems that go beyond a weak economy. Rather, they suggest that these shopping centers are going to suffer long-term declines because Internet shopping offers more choice and greater ease. 

“When [the big-box format] originated, it was about wide selection in a certain category,” said Suzanne Mulvee, retail strategist at CoStar Group, a real-estate-research company. “They had the biggest selection, and that’s why you’d go there. Now the biggest selection is online. So I am concerned about this sector long-term.” 

Many shopping centers that lost Borders after the chain announced its liquidation are suffering high vacancies, falling rents and even debt defaults. Above, a vacant Borders store in Allen, Texas. 

Overall, national vacancy statistics on big-box centers don’t appear too grim, and new construction is scant. With some retailers expanding, like DSW and Ross Stores Inc., ROST +1.45%the vacancy rate has declined to 6.6% after hitting a multiyear high of 7.9% in 2009, according to CoStar. Even so, rents are near the lowest level they have hit since 2006, and the vacancy rate is rising again and will likely hit 6.8% by the end of the year because of more closings, CoStar reports.  

Some large landlords, including some in San Diego commercial real estate leasing, are better positioned to keep their big-box centers filled because they have more clout with retailers and better properties. DDR Corp., DDR +0.79%which counts many big-box centers among its 469 properties, posted average occupancy of 93.7% in the first quarter, up from 92.6% a year earlier. 

“We’ve replaced Linens and Circuit with Bed Bath & Beyond, BBBY +0.80%Marshalls, Ross, Wal-Mart, WMT +0.38%” said Paul Freddo, DDR’s senior executive vice president of leasing and development, referring to the closed Linens ‘n Things Inc. and Circuit City Stores Inc. “We sit here three years later a much better company because of it.” 

But California developer Peter Pau also is giving up on the big-box concept in the Bay Area suburb of Newark, where this year he bulldozed most of his Mowry Crossings shopping center. The 200,000-square-foot center had only one viable tenant—a BJ’s Restaurant—after losing its Mervyns, Circuit City, Petsmart and Babies “R” Us. Mr. Pau still owns the project because he had paid its mortgage, but he now intends to rebuild it as a retail format other than big-box commercial real estate in San Diego. 

“It is no longer a power-center,” Mr. Pau said. “We aren’t banking on big-box tenants.” 

Source: Wall Street Journal

 

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