The larger publicly traded retail landlords are generally bullish on their prospects for re-filling stores that will go dark as a result of the Borders Group Inc. bankruptcy liquidation, despite the collapse this week of a bid by Birmingham, AL-based Books-A-Million Inc. to take over 30 of the stores.
However, the closing of an additional 396 Borders stores, the second major retail chain bankruptcy of 2011 following Blockbuster -- will leave a gaping hole in many centers, along with an additional 7 million square feet of vacant retail space across the country. Landlords relying on Borders for all or a substantial portion of their annual rental income, especially those in smaller markets, will feel the pain most acutely.
The closures will drive up vacancies just as landlords are beginning to see the benefits of recovering consumer spending and heightened tenant demand for shopping center and mall space.
According to a CoStar analysis, the average vacancy rate of centers with a Borders store was 4.2% before the chain closed any of its stores. After Borders closed 230 lower-performing stores earlier this year, the vacancy rate rose to an estimated 9.3% in those centers.
When all 396 remaining stores are closed, that vacancy rate rises to an estimated 18.8% in the absence of replacement tenants.
As always, there are both losers and beneficiaries in the liquidation, said CoStar Senior Real Estate Strategist Chris Macke.
"Shopping centers with a Barnes & Noble will be in a much stronger position because they will get Borders' shoppers and their bookstores will have less competition, leading to a center that's in a stronger position than before," Macke said.
Analysts have expected the bankruptcy for months. The remaining stores include many sites that retail brokers consider to be excellent locations, making it relatively easy to land replacement tenants.
While the closing of Borders has had some impact on large-credit retail REIT landlords, the impact has been minimal, said REIT equity analysis firm Sandler O'Neill.
However, the failed bid by Books-A-Million to take over 30 stores is a blow to Cafaro Co., a privately held Youngstown, OH-based mall operator which anticipated filling eight empty Borders locations with Books-A-Million stores starting as early as next month in Fredericksburg, VA; Erie, PA and Bridgeport, WV and other markets.
Books-A-Million, which operates 231 stores in 23 states and Washington, D.C., on Monday announced that efforts to secure the inventory, fixtures, equipment and leasehold interests for the stores ended unsuccessfully because the parties "could not agree on terms." Some observers have cited the complexity of the Borders leases as a barrier to executing deals.
Another regional operator, Agree Realty Corp., will also feel the loss of affluent Borders shoppers. Farmington Hills, MI-based Agree has a portfolio of 80 single-tenant, grocery anchored and big-box properties in 17 states, nearly 90% of them net-leased to national tenants. The self-managed REIT derives 9% of its annual rental income from Borders, its third-largest tenant.
The news could be worst. Last year, Borders accounted for 27% of Agree's annual rents, but the company sharply lowered its exposure through re-tenanting, acquisitions and rent reduction this year, according to Andrew DiZio, equity analyst with Janney Capital Market.
That probably won't be enough, however, for Agree to avoid entering voluntarily mortgage default on five Borders-occupied properties in secondary and tertiary markets, according to DiZio.
Other businesses also feel the loss of traffic. Many tenants occupying the same centers as Borders and similar types of retailers sign co-tenancy clauses giving them the right to leave if the traffic-generating store, which is in effect a junior anchor, leaves the center.
Because the Borders death was so drawn out, its co-tenants have likely already been impacted -- and certainly have had time to look into moving to other centers, said CoStar Real Estate Strategist Suzanne Mulvee.
Power centers and regional malls will be most affected by the return of just under 7 million square feet of Borders retail space to the marketplace, estimates Garrick H. Brown, national retail research director at Terranomics, the retail division of Cassidy Turley BT Commercial.
Even combined with the Blockbuster bankruptcy for a total of 12 million square feet of vacancy, the market should be able to absorb the blows, Brown said.
The bankruptcies in 2008 of Circuit City, Linens N Things, Mervyn's, Gottschalk's, Steve & Barry's and others brought a tidal wave of 84.4 million square feet back onto the market in an 18-month period, just as demand for junior and big-box space tanked, Brown pointed out.
"This is definitely a hit to the marketplace, but by no means is it a knock-out blow," Brown said. "We continue to see increased growth plans from other retailers," he added, citing
the expansion plans in underserved retail areas announced this week by Wal-Mart and Supervalu.
"We see a lot of active retailers in that 20,000- to 30,000-square-foot range that will help to backfill a lot of the best Borders locations very quickly," he said. "There was a larger pool of retailers about a year ago, but most of the off-price apparel chains and discounters that led the early charge have already found their space."
Brown expects that the best Borders locations will have deals in place within the next six to nine months, with at least half of the 7 million square feet accounted for within a year.
While a significant shock for landlords, CoStar's Macke pointed out that the nation's retail market, with 12 billion square feet of total inventory, absorbed more space in the second quarter alone than is being vacated by Borders.
"In the end, for the larger market, this is more of a psychological impact," he said.
Ann Arbor, MI-based Borders was sold to liquidators last week after creditors rejected a buyout offer from the Najafi Companies. The 400 leasehold dispositions are part of an auction process totaling 8.3 million square feet of property, including 259 full-line stores ranging from 10,000 to 40,218 square feet; and 137 Borders Express and Waldenbooks stores ranging from 625 to 9,390 square feet in malls, strip centers and airports.
The inventory also includes nearly 1.4 million square feet at four distribution centers in Lavergne, TN (376,800 square feet); Carlisle, PA (598,474 square feet); Mira Loma, CA (418,500 square feet) and a dark warehouse in Middletown, PA (107,372 square feet), according to the bankruptcy auction brochure by DJM Realty, a Gordon Bros. company retained exclusively to manage the disposition of the assets.
In addition to Gordon Bros, the liquidation group includes Hilco Merchant Resources, SB Capital Group, Tiger Capital Group and Great American Group.
Retail REIT executives and analysts have touched on the Borders situation in the early round of mid-year earnings conference calls.
"I don't see that the additional vacant space being put on the market with the Borders bankruptcy and liquidation is going to materially change the dynamics that we're experiencing in the marketplace," said Michael Pappagallo, chief operating officer of Kimco Realty (NYSE:
KIM), which is seeing 16 Borders stores in its mall being liquidated. Expanding retailers, perhaps including rival book seller Barnes & Noble, are viewing the vacancies as opportunities, Kimco officials said Wednesday.
Glimcher Realty Trust (NYSE:
GRT) signed shoe seller DSW Inc. to replace Borders at the Dayton Mall in Dayton, OH, and the company is encouraged about filling a Borders that's closing at the Grand Central Mall in Parkersburg, WV.
"We have a good handful of prospects that we have been in discussions with," CEO Michael Glimcher said.
Taubman Centers Inc. (NYSE:
TCO) forecast slightly weaker occupancy growth for 2011 due to the Borders liquidation.
