One of the big unanswered questions of the massive downsizing now going on at Bed Bath & Beyond is how are they able to get out of retail leases without the cover of a bankruptcy filing.
It turns out, at least according to a recent report from financial analyst, banking and consulting company Tag Advisory Group, that many of these stores are worth more to their landlords without BBB as a tenant. And those property owners are all too happy to take back the leases and rent them out to another Big Box retailer that will pay more for the space.
“Occupancy levels are moving higher,” the Telsey report wrote. “There is limited supply of quality retail real estate, for which there is a solid pipeline of demand (and) closing Bed Bath & Beyond and Party City stores are being leased at higher rents.”
Telsey, in surveying recent financial reports from several big retail real estate developers, found that they are taking back those BBB leases, as well as those from another national chain Party City that is closing stores. Off-price retailers like the TJX brands, Burlington and Ross, as well as supermarket chain Sprouts, were mentioned as potential takers for the space by at least one mall operator.
They also said smaller-footprint retailers like pOpshelf, Five Below and Skechers, could take space that would be divided up. Most BBB stores are in the 20,000 to 35,000-square-foot range but the company is also closing about 50 smaller Harmon Beauty/Face Values locations which could attract tenants needing less space.
“Supply of high-quality open-air retail space remains low and demand continues to be strong as demonstrated by our ability to grow rents at compelling returns,” Telsey cites Kite Realty Group saying in mid-February. “We have tremendous demand for the Bed Bath locations, which have an average rent basis of $10.35.”
TAG quotes another developer, Brixmor Property Group, recently stating. “We are signing replacement tenants in the mid-teens. This allows us to create value as we bring in better tenants into our centers and we get the follow-on benefit from additional small shop leasing and an increase in rate.”
Brixmor sees strong upside potential for these locations. “We have been really encouraged by what we have seen so far just from the anchor demand in general, but particularly for these spaces. You are seeing in that size range just a significant amount of demand, looking at Burlington Stores, Ross, TJX all with over 100 store openings, the likes of Sprouts also with significant open to buy. And, even if you split some of that space with the Five Below, pOpshelf, Skechers, there is just a significant amount of demand for that space.”
Another landlord, Acadia Realty Trust, was having similar positive results. “We have two Bed Bath locations that are included on Bed Bath’s recent store closure list. Our Bed Bath exposure is in prime locations at variable replaceable rents. We have successfully signed a new lease at our location in Wilmington, Delaware… (with) a high quality credit retailer that will be taking the entirety of the Bed Bath space in conjunction with an expansion and at a rent that will exceed our current in-place rents.”
Not all of the more than 400 closing stores are prime locations but for the ones that are, Brixmor says that helps to answer how Bed Bath is able to close all those stores without penalties. “We’ve leveraged this tenant demand to recapture space from watchlist tenants at creative returns where we can capitalize on our low rent spaces to bring in better tenants at better rates.”
WarrensReport 