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Life After Dark

At a prime location on 3rd Street in Attalla, Ala., a 56,000 sq. ft. Wal-Mart sits vacant. What was once a busy parking lot is now quiet. The big box is not alone. Wal-Mart Realty, the company's in-house brokerage operation, is currently trying to dispose of 125 vacant buildings. The chain is also preparing to vacate another 270 stores in the next several years. No, the country's greatest retail juggernaut is not slowing down. Wal-Mart simply suffers from a problem increasingly confronted by many big retailers — excess space.

Some chains have unprofitable units that they want to shut down. In other instances, the stores have become too small or unfashionable. “Supermarkets used to be 25,000 sq. ft., but now some chains are opening units that are 55,000 sq. ft.,” says Arnie Sevell, a broker in Boca Raton, Fla. “A lot of times it is cheaper to build a larger store instead of trying to expand the old one.”

In Wal-Mart's case, the extra space occurs when the company shuts down an old store to open a bigger supercenter in the same town. The company would prefer to simply renovate the old unit, but often that isn't possible. Older Wal-Marts are typically around 50,000 sq. ft., while the supercenters can be as big as 225,000 sq. ft. To find such a large plot, the company must often move to the other side of town. Why didn't Wal-Mart open on giant sites 20 years ago? The company failed to foresee the incredible growth that it would achieve.

Expansion turnover

Shopping centers have always been plagued by a certain amount of turnover as companies went bankrupt or left town. But brokers say that the amount of churning has risen in recent years. A decade ago, Wal-Mart and other chains were rapidly expanding, not shutting down old stores. In today's competitive markets, companies are more willing to tinker with formats and close a retail outlet when it appears out of date.

Trying to please Wall Street analysts, chains are quick to close a few stores that aren't meeting profit goals. Nationwide, there is now more than 100 million sq. ft. of vacant space, estimates Michael Wiener, president of Excess Space Retail Services, a disposition specialist based in Lake Success, N.Y., which helps clients pare down their assets.

“Twenty years ago, retailers didn't like to shed stores because Wall Street analysts thought that there must be some skeleton in the closet,” says Wiener. “Now, closing a unit is often seen as a good business practice.”

A shopping center can be crippled when a supermarket or other anchor goes dark. A big source of traffic vanishes along with the anchor. Other tenants are likely to grumble and consider terminating their leases unless the center finds a new magnet.

“When an anchor tenant leaves, the shopping center can spiral downhill,” says Michael Beyard, senior resident fellow of the Urban Land Institute, an education organization with 30,000 members worldwide. “In some of the older strip shopping centers near the metropolitan centers, you see that anchor tenants have been replaced by palm readers and all sorts of month-to-month tenants.”

Anchors away

A departing anchor is not necessarily all bad news. Sometimes a thriving specialty store or discounter can replace a tired department store. Savannah Mall in Savannah, Ga. rebounded after struggling with vacancies. When two anchors departed — Montgomery Ward and Parisian — traffic dropped, and the mall confronted declining traffic. “The vacancies gave us an opportunity to re-arrange the center,” says Kristin Mueller, executive vice president of Jones Lang LaSalle, which manages Savannah Mall. “We began adding stores that would draw a wider range of customers.”

In 2003, the mall introduced a 102,000 sq. ft. unit of Bass Pro Shops Outdoor World, a destination store that often draws shoppers from 150 miles away. Besides selling fishing and camping equipment, Bass Pro Shops feature motor boats and a variety of entertaining displays, such as archery ranges that customers can use.

In 2004, another anchor arrived at Savannah Mall — a 102,735 sq. ft. Target. Sales of the new anchor stores have more than tripled the totals of the original department stores, and the mall's sales per square foot have grown roughly 30% since 2003.

Jones Lang LaSalle devised a different solution for Rosedale Center in Roseville, Minn., a 1.1 million sq. ft. enclosed regional mall. After a Mervyn's department store closed, the property manager decided to tear down the unit and expand it with a wing that would hold 25 specialized outlets aimed at upscale shoppers. The wing will hold units of Williams-Sonoma, Godiva Chocolatier, and Borders Books. Construction of the wing began in the fall of 2005 and is slated for completion in November 2006.

For opportunistic investors, centers with vacancies can present tempting targets, often selling at bargain prices, with cap rates exceeding 8%, compared with rates of 6% for stabilized retail properties. Hutensky Capital Partners of Hartford, Conn. specializes in buying shopping centers with high vacancies. In 2003, Hutensky paid $21 million for Rogers Plaza Town Center, a 404,000 sq. ft. community mall that had seen better days. The anchor, a 150,000 sq. ft. Montgomery Ward, went dark after the chain entered bankruptcy. Hutensky spent $6.4 million on dividing the old department store into two retail spaces and renovating the exterior.

The new anchors included outlets of Spartan Stores, a 54-unit supermarket chain, and A.J. Wright, an apparel retailer owned by TJX Cos., owner of giant T.J. Maxx. “The new tenants brought in four times the sales of the old Montgomery Ward,” says Brad Hutensky, manager of Hutensky Capital Partners. “The center got a lot more traffic than it had seen.”

Hutensky faced a different challenge at the 198,872 sq. ft. Easton Commons Plaza Shopping Center in Houston. The center's eight-screen theater shut down after a competitor opened nearby with state-of-the-art seating and other amenities. To fill the empty space, Hutensky is introducing a new concept — Studio Movie Grill — that is scheduled to open late in 2006. In this format, customers sit down at tables and order meals 30 minutes before the movie. The food arrives, and diners eat while watching the show. “This is a slightly different concept than a movie theater, and we think that it can be very successful,” says Hutensky.

Specializing in asset disposal

A decade ago, disposition of space was just one of a number of areas that a typical retail broker covered. But now filling empty stores has become a substantial business for many brokers, and a few specialize in this niche. Excess Space Retail Services works with about 50 national retailers annually.

In a typical deal, Excess Space provides one-stop shopping. It appraises the value of the property and then markets it through a network of 400 brokers from different firms across the country.

In many cases, the retail client is paying more rent than what the space commands in today's market. If that's the case, the broker may be forced to sublease the property to a tenant who pays less than the full rent. The outgoing tenant will have to make up the difference.

After Payless Shoe Source was spun off from May Department Stores in the 1990s, the retailer decided to close more than 200 of its retail stores. “Almost three-quarters of the locations were disposed of in the first nine months of the project,” recalls Wiener.

Excess Space often handles high-profile projects that involve dozens of units. When Winn-Dixie supermarkets became financially troubled, Excess Space disposed of 157 properties for a total of 6.25 million sq. ft. On average, there were 6.5 years remaining on the leases. In another case, Excess Space got rid of 563 outlets for Eckerd drugstores amounting to 5.6 million sq. ft. The average unit had 4.5 years left on the lease.

The replacement possibilities for dark spaces vary. In rare cases, the Excess Space network broker can replace one supermarket with another one. A full-service department store may sublease the space to a discounter. The challenge for disposition specialists is to be creative in finding a tenant that will take over a location that has proved unsuccessful for its predecessor.

The Wal-Mart way

While Wal-Mart utilizes outside brokers, the giant chain does much of its disposition work in-house. The disposal efforts started in earnest a decade ago when the company began introducing supercenters and needed to close down the older generation of stores. In the 1990s, Wal-Mart Realty held as many as 170 empty stores that were waiting to be leased. Since then, the company has worked to streamline the process, and the number of vacant properties in inventory has been cut by about 30%. “Our inventory of vacant properties is the lowest in years, even though the company is growing,” says Rick Kinnard, senior director of realty dispositions for Wal-Mart Realty.

To expedite property sales, Wal-Mart Realty begins marketing a big box some two or three years before it will be vacated. In the past, the company only initiated sales efforts a year before the store closed. Now by the time that the store is vacated, a leaseholder is often ready to move in.

When a new 225,000 sq. ft. Wal-Mart Supercenter opened in La Quinta, Calif., in 2004, the original Wal-Mart site nearby had been sold to Kohl's, a department store competitor. “When we moved out of the store, Kohl's was ready to take over the space,” recalls Wal-Mart's Kinnard.

Wal-Mart is comfortable shopping its properties to competitors. For example, Wal-Mart has sold or leased stores to discounter Family Dollar, as well as home improvement giants Home Depot and Lowe's.

With some community activists trying to block Wal-Mart's expansion, the giant company takes great pains to ensure that the empty stores are filled in ways that will not damage communities. When Wal-Mart recently vacated a store in Chesapeake, Va., the company leased the space to three national chains, Old Navy, Best Buy, and Ross Dress for Less. Such solid credit tenants will likely help the shopping center retain its strength, say Wal-Mart officials.

To maintain good relations with a community, Wal-Mart also undertakes its disposal efforts by first notifying the local government. Wal-Mart Realty has economic development specialists on staff who meet with local officials to discuss the community's needs and the best use of the empty space.

In some cases, the space is taken for public uses, such as libraries and medical facilities. In Cody, Wyo. an empty store was occupied by a Cody Lab, a startup pharmaceutical manufacturer that negotiated a discount on the lease with the option to buy the property. As the fledgling operation succeeded, it eventually bought the building.

“The deal worked for everyone,” says Wal-Mart's Kinnard. “We got rid of the empty store, and a local entrepreneur was able to take the excess space and use it for a business that would create new jobs and help the community grow.”

Stan Luxenberg is a New York-based writer.

Finding art in empty spaces

As a youngster growing up in Bardstown, Ky. in the 1990s, Julia Christensen watched a Wal-Mart sit empty for eight years after the chain moved across town to a new supercenter. Finally, the space was taken by a church. Christensen became convinced that her town's experience was hardly unique. “There are many empty big boxes, and they can be eyesores for communities,” she says. The memory was a lasting one.

Working toward a master's degree in fine arts at Rensselaer Polytechnic Institute in Troy, N.Y., Christensen decided to travel around the country last year to photograph empty stores and document their impact on communities. She funded the project herself, but has since used the photography and video in nationwide lectures. She also is writing a book about her retail journey.

On the trip, Christensen logged some 20,000 miles. She learned that empty spaces can occasionally be converted in surprising ways. In Round Rock, Texas, a former Wal-Mart became a go-cart track. Other empty big boxes became courthouses and schools.

Now an instructor at Stanford University, the 28-year-old Christensen worries that retailers don't understand the negative impact of vacant stores. “Retailers should try to avoid creating empty spaces,” she says, “because nobody wants to move near a vacant spot.”

In downtown Austin, Minn., a Kmart closed and remained vacant for a decade. The loss of shoppers hurt the entire town, says Christensen. “Grocery stores across the street from the Kmart closed,” she says. “The area seemed like a ghost town.”

Then Hormel Foods, the meat producer, bought the old Kmart site and turned it into the Museum of Spam. With tourists arriving, stores began opening again. The town began planting trees and undertaking beautification efforts. “When a community reclaims empty space, there can be a giant impact on the character of the town,” she says.

A number of vacant big boxes that Christensen discovered on her journey became churches. In Pinellas Park, Fla., a church acquired an abandoned Wal-Mart. Located between Clearwater and St. Petersburg, the church needed a large facility that would be centrally located and easy to reach. “The site was ideal because Wal-Mart and the town had already widened the roads and put in extra stoplights,” says Christensen. “The old Wal-Mart site had become a perfect place for people to go to church.”
— Stan Luxenberg

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