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Store Closings Haven't Stopped

By Mark Dufton
Featured in the November 2012 Issue of  Globe St.com

There hasn't been a major liquidation announcement by a company like Borders for a while, but that doesn't mean that there still isn't ongoing space to fill out there, says Mark Dufton, chief executive officer of DJM Realty, a Gordon Brothers Group company. His firm, which helps fill spaces left by closures will be exhibiting next week at the ICSC New York National Conference in the Hilton Hotel's Americas Hall 1 Booth #362. He recently spoke with GlobeSt.com about the store-closing situation, those who are filling vacancies and other trends.


GlobeSt.com:
It seems like there are less mass store closures taking place. Is that evident on your end of the business?


Mark Dufton: A lot of the closures are just by natural expiration at this point, mainly because the retailers don’t want to take a charge or a write off to close a big group of stores that aren’t expiring where they have a remaining balance on the lease obligation. I’m not so sure that we’ve seen a slowdown in the number of closures, but it’s just a different type of closure. You’re still getting a healthy supply of excess space coming into the marketplace. It’s just not being backfilled that quickly, and if it is being backfilled, it’s being backfilled at lower rents. It’s so market specific right now. The real good real estate, in “A”-quality markets and locations, the rent has held up really well. There is plenty of demand for that space. But there seems to be an increasing gap between the “A” stuff and the “B” and “C” locations. That’s where you really see a tail off in the rents and an increase in the vacancy. That’s the dynamic that is taking place right now. In general, retailers are extremely cautious about opening new stores. They’re just not willing to put their capital at risk. Even when they do settle on a new store, it has to go through two or three real estate committees as opposed to real estate guys teeing it up, rubber stamping it, and getting the store open. That just doesn’t happen any more. It really takes just about twice as long to get a lease done. It probably takes a year as opposed to six months. You can’t lose money on a store you don’t open, so they’re just particularly careful about it. And what they’re trying to do on top of that is offload some of that capital expenditure back on the landlord. Retailers are asking for more tenant allowances.


GlobeSt.com:
So has the relationship between tenants and landlords worsened as a result?


Dufton:
It’s just longer and more pronounced of a process. Landlords have to be much more patient to try to put a tenant in place. They have to be willing to expend more capital to do so. It’s not only the tenant allowances but also the brokerage costs for tenant-rep brokers. It’s a lot of work to put these deals together, and it costs the landlords quite a bit to put the deals together. Landlords are being more selective about credit and credit worthiness because it’s so costly. In the past they would be willing to take a flier. If it didn’t work out you could backfill it. But now you have the higher initial cost, and it’s more difficult to lease it again.


GlobeSt.com:
Does a lack of new development impact this at all?


Dufton:
It’s just a function of what is happening in the retail marketplace, the sort of stagnation in retail in general. There is a spate of information out there about bricks and mortar retail versus the Internet and how that is playing out, and retailers need to figure that out before they go on any significant expansion tears.


GlobeSt.com:
Who are you seeing expanding in this environment?


Dufton:
The discount and dollar-store operators are still pretty active. The likes of Dollar Tree and all of the TJX concepts and Big Lots! and folks like that continue to be the trend. There are some international retailers that view this as a good time to take a crack at our market. We’re seeing some quasi retail uses if you will, a lot of gym expansions and the auto parts guys.


GlobeSt.com:
Are you seeing many non-traditional uses going into shopping centers these days?


Dufton:
There is a proliferation of charter schools. Some of these “B-“ and “C” centers will be converted into schools or municipal locations.


GlobeSt.com:
How do you see the business climate at the ICSC New York show playing out this year, and what are you looking to accomplish?


Dufton:
“Cautious” is the buzz word of the day on everybody’s part. I don’t think that anybody’s going into this thinking there is a major breakthrough in deal making at the end of the year. I don’t get that sense at all. We have a good set of core clients and are trying to pick up some new ones. We have an expanded service offering that we are going to discuss with some clients where we actually help them on the growth side of the business, not in the tenant-rep sense, but there has been an uptick in retail M&A, and that is a function of caution about opening stores on a one-by-one basis. But if you do have expansion plans, an acquisition is probably the way to go. But te problem is that none of the pieces fit exactly right. So what we will do is joint-venture with the buyer to offload the assets they don’t need going into a transaction. We’ll strip out all of the owned real estate or cap their exposure on leases. Through our parent company, Gordon Brothers, we can buy inventory, equipment, brand names or any other unwanted assets. The retailer can then buy the asset that they want at the price that they want. We’re also offering a full scope of lease services, such as renewals, mitigation, termination and even auditing. We’re doing the full scope of occupancy expense reduction. That’s pretty important to retailers nowadays, to minimize their costs and their excess portfolio and making sure they’re not overpaying.