Landlords of local community shopping centers, already battered by rapidly rising vacancy rates, are preparing for another round of pummeling as a result of Kmart Corp.’s filing for bankruptcy protection.
The troubled discount retailer, with almost 80 stores in the Chicago area, said on Tuesday that it would ax an unspecified number of poorly performing stores after reviewing sales figures and lease terms for each location. The company leases all but a tenth of its 2,114 stores nationwide.
At an estimated average size of about 115,000 square feet per location–Kmart Super Centers are about 175,000 square feet–closing even eight local outlets would significantly push up vacancy rates at a time when few retailers with similarly sized stores are expanding.
“I wish I could tell you there was a huge stable of players out there today,” said retail real estate expert Todd M. Caruso, managing director for real estate firm CB Richard Ellis Inc. “As a single unit, I think the list of potential replacement tenants is very limited.”
Retailers that may consider Kmart sites include grocery stores, such as Cincinnati-based Kroger Co., which is introducing its Food 4 Less discount outlets to the area. Other candidates are home improvement chains such as Atlanta-based Home Depot Inc., or possibly North Carolina-based Lowe’s Cos.
Even before Kmart starts closing stores, the vacancy rate was already climbing for local shopping centers, particularly older facilities.
The vacancy rates rose to 10.3 percent during the fourth quarter, compared with 8.2 percent during the same period in 2000, according to a CB Richard Ellis survey of the 99.2 million-square-foot retail real estate market. The study includes retail properties that are at least 50,000 square feet, but excludes regional malls.
Although last year’s rise in the vacancy rate was one of the largest increases in a decade, experts note that the retail real estate market is still relatively healthy. The vacancy rate has been steadily rising since the middle of 2000, when it reached a 10-year low of 7.3 percent
More troublesome is the lack of demand for space, they say. As a result, some experts predict that Kmart closings could raise the local vacancy rate by as much as 2 percentage points, to more than 12 percent.
Because of a shortage of large-format users, many of the former Kmart stores will be divided up between smaller users.
And sites that were poor performers for Kmart may be much better locations for other retailers, said retail expert Edward Zifkin, president of Chicago-based Zifkin Realty & Development LLC. “The real question is the velocity, how long will it take to fill the space, and that’s very difficult to say without knowing what sites will be in play,” he said.
In a further blow to landlords, Kmart said it would ask for immediate bankruptcy court approval to terminate the leases on 350 previously shuttered locations where the company was still paying rent, a move that would save the company $250 million annually.
In addition, the bankruptcy filing raises questions about the value of $373 million in Kmart guarantees that back leases signed by its former subsidiaries: Borders Group Inc., OfficeMax Inc. and Sports Authority Inc. The guarantees kick in only if the onetime subsidiaries default on leases.
