(FROM THE WALL STREET JOURNAL 11/18/15)
By Liam Pleven
Several retailer bankruptcies this year have left owners of malls and shopping centers scrambling to fill empty stores. But some landlords smell opportunity.
The vast majority of these type of properties are occupied and spare space is in short supply in many parts of the country, according to experts and landlord data. That is boosting the confidence of landlords who believe they can find new tenants and charge them higher rents.
After grocery chain A&P, filed for bankruptcy in July, for example, Brixmor Property Group Inc. said it bought back three leases in a bankruptcy auction under which the grocer, formally known as Great Atlantic & Pacific Tea Co., was paying an average of $6.59 a square foot. The firm, which owns shopping centers in 38 states, will be able to charge new tenants $20 to $30 a square foot, said Michael Carroll, chief executive.
"It's a good thing in small doses," said Mr. Carroll. He cautioned that "You don't want to see 500 to 1,000 stores of 25,000 square feet come back onto the market," but he doesn't anticipate that scenario.
Other retail real-estate investment trusts, such as Kimco Realty Corp. and Federal Realty Investment Trust, also snatched up A&P leases at their properties.
Don Wood, Federal Realty's chief executive, told investors recently it was a "calculated gamble" to buy the leases and let the space sit open while the company finds new tenants, rather than letting another retailer buy the leases and start paying rent immediately.
Things aren't perfect. Retailers have had a rough run-up to the holiday season, with big chains like Macy's Inc., Nordstrom Inc., Dillard's Inc. and Dick's Sporting Goods Inc. posting disappointing sales results that analysts fear could lead to more aggressive discounting over the remainder of the year. That could put more pressure on weaker retailers, which will have to compete more aggressively not to lose sales, even at the expense of needed profits.
Vacancies can cause short-term headaches for landlords, and the share prices of several real-estate investment trusts that focus on retail properties are lagging behind the overall market in 2015.
In general, the bets for higher rents tend to pay off more often for landlords who own property in densely populated or affluent areas where retail space is particularly coveted, said Paul Morgan, an analyst at Canaccord Genuity.
In those locations, losing a tenant who is paying rent under a lease signed years ago may be less worrisome, he said.
"The longer they've been in the location, the greater the upside generally is," Mr. Morgan said.
Property owners with less desirable locations may be more troubled when a retailer struggles, Mr. Morgan said.
A number of other retailers besides A&P have filed for bankruptcy this year, including American Apparel Inc. and RadioShack Corp.RadioShack was the largest retailer by assets with publicly traded stocks or bonds to file for bankruptcy since 2010, according to figures from BankruptcyData.com.
As a resultof flagging sales at some large retailers and changing consumer tastes, a broad range of companies face investor concerns over their prospects. Shares of Macy's have fallen 42% this year, while Sears Holdings Corp.'s shares are down 32%. Apparel merchants Gap Inc. and Aeropostale Inc. are down 41% and 71%, respectively.
Landlords also have taken a hit. Shares of General Growth Properties Inc. and Macerich Co., two major mall REITs, are down 11% and 8.7%, respectively, this year.
Simon Property Group Inc., the largest mall REIT in the U.S. by market value, reported a drop in occupancy in the third quarter that CEO David Simon told investors was largely due to bankruptcies.
But occupancy levels are generally high in the industry. Simon Property said that despite its hiccup, 96.1% of its space was occupied at the end of the third quarter, compared with 93.6% five years earlier.
Some real-estate industry insiders believe that for retailers, the worst has passed for now. "Our watch list is as low as it's been in years," said David Henry, CEO of Kimco, in an interview.
REITs are counting on a tight supply of retail space in the most desirable markets to help insulate them from any pain. And they contend that a certain amount of turnover among retailers can be healthy and beneficial.
"It's like a forest. Two or 3% of trees die a year," said Mr. Henry. "If you own good real estate, someone else is going to want that box."
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