During 2008 and 2009, several major retailers that typically leased junior anchor tenant positions in shopping centers closed hundreds of stores nationwide. Among the largest closures were 722 Circuit City stores, 589 Linens 'n Things stores, 367 Goody's Family Clothing stores, 276 Steve & Barry's stores, 135 Office Depot stores, and 103 CompUSA stores. We estimate that with these 2,189 store closures, these six retailers are responsible for creating more than 69 million square feet of junior anchor space availabilities.
The mass closure of stores completed by this set of six retailers represents only a slice of the total pie of junior anchor spaces available for lease at the nation's shopping centers -- specifically, about 25% of the total spaces and 35% of the total square footage. According to
CoStar Property Analytics, there are currently about 8,900 junior anchor spaces totaling 200 million square feet, available for lease at existing shopping centers across the country. About 75% of this available space is currently vacant, while the remainder is currently occupied, but available for lease.
Unfortunately, many of these spaces have been on the market for a long time. Specifically, 72 million square feet of junior anchor space has been on the market for 22 months or longer, while approximately 79 million square feet has been on the market under one year and 50 million square feet has been on the market for 13 to 21 months.
The good news is that some retail tenants are beginning to expand and have begun backfilling these junior anchor vacancies. According to CoStar information, leasing activity on these spaces began picking up slightly in summer 2009. Since the beginning of 2009, CoStar has recorded the signing of at least 1,230 new retail leases qualifying for the junior anchor store size range.
(Note that the typical junior anchor store is between 25,000 and 40,000 square feet; but depending on the size and function of the shopping center it inhabits, it is not uncommon for a junior anchor store to range from 15,000 to 50,000 square feet -- the latter range is what we used for the purposes of this survey.) Inland Western Retail Real Estate Trust recently announced that since November 2009, it has signed 10 new leases totaling 316,050 square feet on spaces that were formerly occupied by Linens 'n Things and Circuit City.
In an interview with CoStar,
Shane Garrison, chief investment officer of Inland Western said, "We lost about 3% of our portfolio occupancy from the Circuit City and Linens 'n Things bankruptcies. Today, we have leased or under LOI a little north of 60% of those spaces. A large portion of that lease-up has taken place in the last six months. We are definitely witnessing an increase in leasing interest and overall deal velocity in most areas of the country with Phoenix and Las Vegas still lagging a bit."
Of the 10 junior anchor leases Inland signed since November, Best Buy leased three and Ultimate Electronics and TJX Companies leased two each. In addition, retailers Bed Bath & Beyond, hhgregg, and Ashley Furniture each leased one of the spaces. Dollar Tree, Ross Stores, ULTA, Hobby Lobby and buybuyBABY also make Inland's list of national retailers that have been most active in leasing vacant junior anchor space.
Garrison confirmed that leasing up these vacant junior anchor boxes has taken longer and been more challenging than in recent past. "The leasing process is definitely much more protracted; which is driven by many factors ranging from increased competition for fewer tenants in the marketplace, to capital constraints on both retailers and landlords."
One strategy Inland has taken to lease these spaces is to step up its "retailer outreach program," said Garrison. "We programmatically contact our retail partners and perform portfolio reviews. These meetings not only include a discussion of current locations, but also includes any new formats the retailer may be shifting to, as well as any prospective locations we feel should be discussed based on our analysis of the market(s)," he explained.
Addressing whether Inland has agreed to lower rental rates than the previous tenant was paying in order backfill junior anchor vacancies, Garrison said, "Landlords strive to maintain rental rates within their centers. However, in the face of a dramatic downturn, other considerations come up -- including co-tenancy risk and possible debt coverage issues, to name a few. For example, if faced with a 15% reduction in base rent for a replacement lease, versus the possibility of losing two or three other tenants on a co-tenancy sunset, the landlord is obviously going to choose the option that maintains overall center integrity and value. That being said, high barrier areas have generally held up very well on a comp basis."
A number of other retail REITs have had success in leasing up vacant junior anchor spaces recently as well. Retailers named repeatedly by REITs as signing new leases on existing vacant junior anchor spaces include TJX Companies (TJ Maxx, HomeGoods, Marshalls), Ross Dress for Less, Best Buy, hhgregg, Bed Bath & Beyond, PetSmart, Jo-Ann Fabrics, H&M, Golfsmith
Kimco Realty Corp. had 58 vacancies in its portfolio stemming from the Linens 'n Things and Circuit City closures. As of the close of fourth quarter, the REIT had re-leased or under LOI, 34 of those spaces -- 10 of those leases were signed in the latest quarter.
However, Kimco reported that the rents agreed to by replacement tenants were 10% to 30% lower than the previous tenant.
Drew Alexander, president and CEO at Weingarten Realty Investors said that during 2009, its rent spreads for new junior anchor leases were down 11.5%.
"I certainly wouldn't expect the rent spread on the junior anchors to improve. Having said that, demand has improved substantially from what it was three or four months ago and a lot of retailers are now submitting LOI's on junior anchor spaces that four or five months ago had no activity," said
David Henry, Kimco's president and CEO.
In addition to the roll down in rents,
David Lukes, COO, said that the junior anchor tenants signing new leases are getting tenant improvement allowances in the range of $30.00 to $40.00 per square foot. However, Lukes said tenant improvement costs are trending down, as the company is starting to see multiple letters of intent on available junior anchor spaces.
Lukes said that the increase in leasing activity on the junior boxes has "been a very positive force. If it continues, even at a modest pace, that's going to help us a lot on occupancy." The only way for the retailers that are signing new junior anchor leases to grow their footprint right now, said Lukes, "is to fill vacant space in existing shopping centers because there is no development pipeline."
While Kimco has already had success leasing up the best vacant junior anchor boxes in the country's largest cities, Lukes expects that this year, landlords will start to see junior anchors move into spaces located in the next 20 to 30 MSAs -- those submarkets that still have a lot of population. "When you're in footprint growth [mode], you're going to be looking at secondary markets. It's just going to take time," he said.
Developers Diversified Realty said that during 2009, it executed 49 leases on vacant junior anchor spaces representing 1.6 million square feet. Unfortunately, this is a drop in the bucket for the shopping center landlord, as they had 6.9 million square feet of vacancy to deal with from the major bankruptcies of 2008-2009. The good news is, it does have 34% of that space currently under LOI or lease negotiation.
Daniel Hurwitz, DDR president and CEO, said that the leases being signed with junior anchors today are consistent with history -- 10 year leases with a couple options to renew.
Quelling concerns of ability to backfill, for those landlords that may not have the "best" vacant junior anchor spaces in their market,
Paul Freddo, DDR's senior EVP of leasing said, "as space gets absorbed, you might have had the second or third best box in a market last year; but you may have the only box left this year and we're starting to see activity on that stuff. That's been a very pleasant surprise." Freddo added that vacant junior anchor spaces are benefitting from the avenue some anchor retailers have taken to downsize their formats to "fit nicely" into the 20,000 to 50,000-square-foot range.
Dennis Gershenson at Ramco Gershenson Properties Trust said the company had 11 former Linens and Circuit City vacancies in its portfolio. As of the close of fourth quarter, Ramco had four executed leases and three LOIs on these spaces. "Although our signed leases and active negotiations are at rental rates which are less than those previous, we are leasing these vacancies to major retail draws," said Gershenson.
Pennsylvania Real Estate Investment Trust said it had recently signed two leases with PetSmart (one at a former Goody's store) and five leases with hhgregg that backfilled 153,000 square feet of former Circuit City and Linens 'n Things spaces. PREIT got creative in backfilling a former 49,000-square-foot Steve & Barry's space at one of its malls. "We transformed the space into an antiques and collectible mall. All 92 available stalls have been leased with additional vendors planned for the spring. This initiative was honored with the gold ICSC MAXI Award," said president of PREIT Services,
Joe Coradino.
CBL Properties said that it had 50 vacant junior anchor spaces created from the 2008 bankruptcy and closure rash in its portfolio and to date, it has executed leases or LOIs on more than 1 million square feet, or approximately 45% of that square footage.
Spotlight On: hhregg Geoffrey Mackler of H&R Retail worked with Jeff McElhinny of Atlantic Retail in representing hhgregg in the recent signing of 14 leases, totaling 471,395 square feet and average 33,671 square feet each, in the Washington DC and Baltimore regions. In fact, these leases were executed between November 2009 and February 2010. Additionally, H&R Retail confirmed that all of these leases backfilled existing vacant junior anchor spaces, primarily created from the liquidation of Linens 'n Things, Circuit City, CompUSA or Steve & Barry's stores.
The retailer "saw an opportunity to penetrate this market and acted swiftly in order to realize its goals," said Mackler. While this move will create a "strong presence" for hhgregg in this market by the end of 2010, Mackler added that the retailer continues to seek sites for future locations in the Washington DC/Baltimore area.
Following, we share the identity and average square footage of some of the retailers that have been the most active in signing new retail leases for junior anchor spaces (size range of 15,000 to 50,000 square feet) since the beginning of 2009. 
