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Could Toys R Us Tip Retail Into Record Store Closures?

While 2017 went down in the books as a year of record store closures, 2018 could meet or even exceed that number.

Nearly 9,000 stores closed last year, threatening to make ghost towns out of some shopping centers and resulting in heavy turnover in others. Though the fast and furious pace of doors closing has slowed, a steady drumbeat of big chain bankruptcies coupled with a continued strategic weeding out could add up fast.

A recent report from commercial real estate data firm Reis stated mall and shopping center occupancy saw the largest decline since 2009 during the second quarter. Bloomberg said the bankruptcy and subsequent closure of Toys R Us was among the biggest culprits of the 10.2% vacancy rate.

The toy chain shuttered more than 700 locations last week. Its troubles, like many other defunct and struggling retailers, can be traced back to a leveraged buyout. The chain took on more than $5 million in debt in 2005 after a leveraged buyout from Vornado Realty Trust, KKR Y Co. and Bain Capital.

“This will go down as the year of leveraged buyout bankruptcies,” said Garrick Brown, Cushman & Wakefield’s vice president of retail research for the Americas.

He said the struggles of stores like Claire’s, which operates about 1,500 stores in North America and filed for bankruptcy in March, and Guitar Center, 99 Cents Only and Neiman Marcus are putting retail on pace to fulfill the real estate and commercial property solutions firm’s prediction that 2018 would be worse than 2017.

“We’ll be on track for 10,000 to 11,000 closures,” Brown said. “We thought it would be more about strategic closures vs. leveraged buyouts. We’re on track to match last year but we’ll probably surpass it.”

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Strategic closures

And while apparel retailers, especially, are in contraction mode, Mark Hunter, managing director of CBRE Retail Asset Services in the Americas, sees a change in apparel retail fates on the horizon.

“Soft goods, especially apparel, is such a trendy business, and active apparel for the longest time fueled that growth but it isn’t as popular as it once was so those retailers looking for the next hot trend that’s yet to come but it will happen,” he said. “The good retailers will catch onto the new trend, and then you’ll see them expand again. It’s a combination of too much retail space as well as no new fashion trend.”

Until then, retailers are continuing to downsize with an ongoing list of closures as they assess how many locations they need.

Abercrombie & Fitch will close 60 doors this year. Foot Locker’s saying goodbye to 110. Hudson’s Bay Company is axing 10 Lord & Taylor locations, including its New York City flagship. Even Starbucks is downsizing.

Just this week, Sears Holdings, another business that always seems to be perilously close to landing in bankruptcy court, announced another 10 doors would close. The retail group, which includes Kmart, has be steadily chipping away at its fleet over the last few years, with 326 closures in 2017 alone. If it does finally fold, Brown says, expect all retail stocks to take a hit thanks to “guilt by association.”

And if the department store chain—or any other store—does end up filing Chapter 11, the chances that they’ll be saved are slimmer than last year.

In 2017, retail chains had a decent chance for coming out the other end as a going concern. This year, stores are not likely to be as lucky, according to Brown.

“Bankruptcy is like a roach motel,” he said. “Last year, Payless shed 1,000 stores, but they re-emerged. The same with Radio Shack, which re-emerged. Creditors are looking at troubled retail concepts and saying we’re out.”

One example is The Bon-Ton Stores, which looked like it might pull off a last minute deal before succumbing and leaving 250 empty boxes in its wake.

The TRU effect

For Brixmor Property Group, which has 11 Toys R Us locations in its portfolio, this scenario is a repeat of what it went through with the Sports Authority two years ago, a situation from which the open-air shopping center group emerged with a higher net operating income from those boxes.

Speaking during the company’s first quarter earnings call in May, CEO and president James Taylor characterized demand as “very high” for the size boxes TRU is leaving behind. “We feel pretty good about the demand and the activity that we’ve had on the boxes so far,” he said, adding in general when Brixmor gets space back, the company unlocks “significant value.” “In fact, we continue to realize significant gains in small shop occupancy for centers where redevelopment or an anchor repositioning has been completed.”

Echoing Taylor almost exactly, Kimco Realty CEO Conor Flynn said in April that his company is seeing “significant demand” for the 22 TRU spots in its fleet. And getting new tenants in will likely result in more revenue, Flynn said, as Kimco will be able to demand market rents that are higher than those currently paid. “The mark-to-market opportunity within our portfolio is significant and just on the anchor boxes alone we are 66 percent below market and when we say that over 98 percent occupied in our anchor boxes, those are opportunities we love to get back.”

Overall, Flynn said occupancy in his centers was flat for small shops at 89.6% but up to 98.3% for anchors in Q1.

At Taubman Centers, occupancy was flat for the first quarter when compared to the same period last year but the company is seeing other positive signs. Chairman, president and CEO Robert Taubman reported the properties saw a 10 percent uptick in apparel sales following a stint of less than stellar performance from the category.

“Aéropostale, Abercrombie, the Gap, Banana, these are mainstays of the mall,” Taubman said. “And when mainstays of the mall start to go up double-digit, that’s a really positive sign.”

For Weingarten Realty, the money’s on off-price. Executive vice president and COO Johnny Hendrix said the fallout from leveraged buyouts is “a fairly familiar theme.” But on the other end of the spectrum TJ Maxx is a “top tenant.”

“We really like TJ Maxx,” he told analysts on the company’s fourth quarter call in April. “We still have a lot of runway with TJ Maxx, Ross and some of the discount clothing guys.”