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Closed Kmart stores could steal tenants from planned projects

With another round of Kmart store closings set to begin soon, shopping center execs are already attempting to digest the impact.

Some of Kmart's boxes may be offered on the cheap, due to the age of some of the properties. Stores in sought-after locations will also re-lease quickly, as evidenced by the recent round of Kmart store closings that were snapped up by the likes of Kohl’s.

But the ripple effect of the upcoming round of closings could be felt for the next few years. The free spaces could crimp new development as big-box retailers salivate over potential blocks of the better-located stores from Troy, Mich.-based Kmart, according to several real estate industry execs.

Several speculative store closing lists began circulating last fall and potential interest is says to be coming from Home Depot and Kmart rivals Target and Wal-Mart.

While it's not evident if some or any new developments have been cancelled, due to the potential impact, brokers are bracing for the worst. "Usually a developer kicks off a new development if they have a mass merchandiser," says Julie Solomon, a broker with Retail Insight in the metro Atlanta market. "If those mass merchandisers take the less expensive Kmarts, there will be less new development in the next year or more."

Kmart's closings will also impact junior anchor deals and may even cancel some as those retailers look to jump into cheaper leases at former Kmarts.

Bill Anderson, a principle in Pinnacle Realty & Development in Durham, N.C., says he's not even planning to chase big-box deals until at least 2005.

"What's the point," Anderson says. "TJ Maxx, Staples and Ross Dress for Less are going to be all over those."

Rezonings and public approvals for new development are already difficult, Anderson added. "Opening in an existing Kmart is not like going through a full-tilt rezoning," he says.

But the expense of dividing the space for junior anchors, such as TJ Maxx, Staples and others, could deter some retailers after costs are factored in the lease rates for new store fronts, HVAC systems, loading docks and dividing electrical.

Kmart leases the majority of its 1,832 stores, with the exception of about 130, which the company owns, according to the company's most recent annual filing. Most of the store leases are for terms of 25 years, with multiple five-year renewal options. Many of the leases are older and by industry estimates, range from $3 per sq. ft. to $8 per sq. ft., depending on location.

The cheaper rates look more attractive when considering that lease rates in new developments could be up to $14 per sq. ft. and higher, in some cases.

Kmart plans to divulge its exact store closing list later this month and analysts speculate that the discounter could close anywhere from 300 to 500 stores. In the end, the actual store closing number could be higher after the chain digests its holiday sales figures. The worst-case scenario is a liquidation of all stores. On Dec. 19, the New York Stock Exchange delisted Kmart's stock since the company's share price traded for under $1 for more than 30 consecutive days.

Kmart plans to submit its new business plan to the U.S. Bankruptcy Court by Feb. 24. The company began operating under Chapter 11 protection in January and expects to emerge from bankruptcy in the first half of 2003.

Contributing writer Renée DeGross covers retail business and development for the Atlanta Journal-Constitution.

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