For much of 2009, hhgregg Inc., an Indianapolis-based regional electronics big-box chain, occupied a rare corner of the retail universe: It was a retailer that actually grew its store base.

The chain, which operates stores selling consumer electronics and home appliances in 11 states primarily in the Southeast, went public in the summer of 2007 and has its sights set on becoming a larger player in the consumer electronics segment. Since last June, hhgregg has opened at least 15 new stores and upped its store base to 128 total locations. In October and November alone, the chain announced new openings in Nashville, Tenn., Memphis, Tenn., Tampa, Fla. and Virginia Beach, Va. In the company’s earnings report for the quarter ended Sept. 30, 2009, filed last November, the retailer disclosed plans to open 20 to 22 new sites in its fiscal 2010 and up to 45 stores in its fiscal 2011.

In an environment where many retailers remain unwilling to sign new leases, hhgregg’s appetite for new space—especially vacant locations it can repurpose—is a welcome sight for beleaguered landlords still smarting from the glut of empty big-box space that hit the market in 2009.

The chain’s latest deal is emblematic of how the firm has pounced on the current climate to expand. Recently, hhgregg agreed to take over a 32,000-square-foot former Circuit City store at Paxton Towne Centre in Harrisburg, Pa. Vacant spaces like this one offer the chain several advantages over building from the ground up. Many former Circuit City boxes, for example, are located in the kinds of metropolitan areas hhgregg is now targeting for growth. In addition, hhgregg’s concept meshes nicely with former Circuit City sites since both merchants favored boxes in the 30,000-square-foot range. Moreover, the generous leasing terms landlords are granting today are beyond anything tenants could have dreamed about just two or three years ago. All of this adds up to a great opportunity for hhgregg to grow quickly without having to invest massive amounts of dollars in the process.

As hhgregg and other up-and-coming big-box tenants step into the fold, landlords can hope that the deluge of excess space that drowned the market in late 2008 and 2009 is starting to get mopped up. In all, the liquidations of category killers like Circuit City and Linens ‘n Things and closures by other chains dumped millions of square feet of space on the market. Circuit City alone occupied about 22 million square feet of space. This has created an attractive opportunity for smaller retailers to pick up market share, says Branson Edwards, Chicago-based executive vice president and managing director of retail occupier services with commercial brokerage firm Grubb & Ellis. “The best example of that is hhgregg in the Northeast with Circuit City spaces,” he notes. “They are taking fairly aggressive moves toward that portfolio of space to get that market share.”

The emergence of players like hhgregg, along with growing dollar store chains and other discounters, could reshape the picture for owners of big-box space. Overall, the bankruptcies, liquidations and store closings that took place starting in late 2008 caused the national vacancy rate for big-box space to jump 390 basis points from the third quarter of 2008 to the third quarter of 2009, to 8.9 percent, according to research from Marcus & Millichap Real Estate Investment Services, an Encino, Calif.-based brokerage firm, and the CoStar Group. And that’s only counting stores in the 50,000-square-foot to 100,000-square-foot range. Many former Circuit City locations, for example, of which there were 567 at the beginning of 2009, come in 15,000-square-foot, 20,000-square-foot and 35,000-square-foot formats.

Meanwhile, demand for the leftover space has been slow to materialize—in the 12 months leading up to the third quarter 2009, the big-box category registered negative absorption of 1.9 million square feet, according to Marcus & Millichap and CoStar. During the same period in 2008, absorption was a positive 680,000 square feet.

The mass closings of junior anchors are particularly painful for landlords not just because of the reduction in rental income, but because when tenants like that move out, they often trigger co-tenancy clauses in other retailers’ leases that result in lower rents or release the tenants from their leases entirely, eliminating the need to pay early termination penalties. One piece of evidence that this has been occurring is that through most of 2009, many shopping center REITs attributed NOI declines to the impact of junior anchor closings.

The question now is whether or not the picture is beginning to turn. Many brokers and landlords are reporting a pick-up in interest in vacant big boxes that began late last summer, but the increase is not across the board. Urban markets with tighter inventories will rebound quickly while suburban and exurban sites may languish for years. In fact, most of the demand for big boxes over the next two years will likely be limited to markets like New York, with established populations and limited supplies of space, according to David Solomon, president of NAI ReStore, a Narberth, Pa.-based retail real estate services firm. Some of those spaces might have to be subdivided, but they will be picked up, he says. Washington, D.C., San Francisco, Los Angeles and Houston represent some other metro areas where retail real estate conditions remain stable compared to the rest of the country, according to the Emerging Trends in Real Estate 2010 report from the Urban Land Institute and PricewaterhouseCoopers.

In New York City, for example, retailers tend to quickly snap up vacant slots. A 48,000-square-foot Circuit City store closed in Union Square in March, but in November, a Best Buy store opened in the same spot. Regional furniture seller Raymour & Flanigan snatched another Circuit City outpost, a 30,000-square-foot store on the Upper West Side. Meanwhile, several tenants are currently in negotiations for a Circuit City space on the Upper East Side, according to Gene Spiegelman, a broker with Cushman & Wakefield Inc., a global real estate services firm.

In addition, TJX Companies, which operates discount chains TJ Maxx and Marshalls, is also on the prowl for former Circuit City and Linens ‘n Things sites in the Big Apple’s outer boroughs, according to Bill Miller, vice president and director of real estate with the retail services outsourcing group of Jones Lang LaSalle, a Chicago-based commercial real estate services firm.

In other primary markets Best Buy, Bed, Bath & Beyond, Dollar Tree and Kohl’s are scoping out big-box opportunities, according to reports from executives at various shopping center REITs. Supermarket operators and fitness clubs too are showing increased interest. As a result, Kimco Realty Corp. reported that in its third quarter, 66 percent, or 490,000 square feet, of all new leases signed were in the junior anchor category. New Hyde Park, N.Y.-based Kimco is the largest shopping center operator in the U.S., with a 113-million-square-foot portfolio.

“I do believe we are starting to see the market pick up,” says DJ Wight, president of Retail Lease Trac, a web-based retail tenant information service. “With the value retailers, we’ll start to see maybe not new construction, but taking something that belonged to a retailer that isn’t there anymore and refurbishing it.”

Yet many real estate consultants caution landlords against excessive exuberance. The increase in demand for empty big boxes needs to be seen in perspective. There’s a perceived uptick, but it is very moderate, with only one or two retailers showing interest in even class-A locations, says Andy Graiser, co-president of DJM Realty, a Melville, N.Y.-based real estate consulting firm that handled the Circuit City portfolio in the wake of the retailer’s liquidation last year. For the time being, any existing demand will likely be limited to stores in top markets, adds Solomon.

Big boxes in outlying areas that followed new residential growth will continue to struggle. “The class-A properties will probably lease first, but the class-B and class-C properties will be more challenged,” says Tom Maddux, president with KLNB Retail, a Towson, Md.-based tenant representation firm. “I am sure that some of these properties will languish for many, many months, perhaps years, if the quality of real estate isn’t that great.”

During the peak of the market many big-box operators opened locations in emerging areas, hoping to capitalize on future residential growth. Those stores might sit unoccupied for years, until the residential sector resurges, Solomon notes. In many of those cases, landlords will eventually be faced with options ranging from leasing the space to non-retail uses like schools or government agencies to walking away and giving the keys back to the lender.

“I think the era of big-box expansion in the U.S.—I don’t want to say that it’s over—but it mirrored a lot of residential growth and that’s not happening right now,” Solomon says. “For the foreseeable future, at least the next two or three years, I don’t see a lot of big box expansion needed: Where are they going to go?”

Plus, it is possible that the bloodletting among big box retailers isn’t over yet. Depending on how the holiday shopping season shakes out, additional big box players may decide to close store during the first quarter of 2010, pushing inventory levels even higher, according to the Emerging Trends report. The chains most likely to exit the scene this year will be the smaller players with five to 10 locations that don’t have the scale to weather another lackluster holiday sales season, according to R.J. Hottovy, a retail analyst with Morningstar.

Next Page: On the lookout

On the lookout

That being said, there are some tenants that are looking at empty big boxes as an attractive expansion opportunity. Many value and off-price retailers, including TJ Maxx, Marshalls and Dollar Tree, operate stores that are in the same 30,000-square-foot to 40,000-square-foot size range as the former Circuit City and CompUSA locations and are actively looking for new stores. (CompUSA was another electronics retailer that liquidated in the course of the recent recession). During TJX Companies’ third quarter conference calls with analysts on Nov. 18, President and CEO Carol Meyrowitz said the firm saw potential for 1,500 new stores portfolio-wide, not counting expansion into new countries. TJX plans to end 2010 with a net of 93 new stores.

Meanwhile, Dollar General, one of the largest discount retailers in the country, is on target to end fiscal year 2009 with 500 new stores and plans to open another 600 in fiscal 2010. Dollar General, which has just completed an IPO this November, has actually benefited from the recession, reporting double-digit same-store sales growth as U.S. consumers have become more price-sensitive.

In addition, by the end of its fiscal 2009, on Jan. 31, discount chain Big Lots will open a net 22 new stores, some in former Linens ‘n Things boxes. And home improvement chain Lowe’s will open 64 new stores.

Meanwhile, some category killers, including Best Buy and Bed, Bath & Beyond have been accelerating expansion as well. During the second quarter, for example, Bed, Bath & Beyond opened nine namesake stores, three buybuy Baby stores and a Harmon Face Values store. Some of those stores have been helping to fill vacancies left by now defunct rivals. When Bed, Bath & Beyond opened a 41,000-square-foot location at Gateway Plaza in Vallejo, Calif. this November, it took over a former Linens ‘n Things spot that has been sitting vacant for almost a year.

In the second quarter of fiscal 2010, ended Aug. 29, Best Buy opened 12 Best Buy stores, nine Best Buy Mobile stores and one Pacific Sales store.

“Some of the stronger big-box retailers are probably in a position to start accelerating their expansion plans, given that real estate costs are lower and there are attractive opportunities that have arisen,” says Hottovy. “I don’t think we are going to see numbers like we have in the past few years, but category leaders like Dick’s Sporting Goods, PetSmart and Bed, Bath & Beyond can at least maintain store openings.”

Certain supermarket operators, including Tesco, Schnuck Markets and Jewel-Osco, have begun using big boxes to jump-start some of their smaller, grocery-centered concepts, as has Walmart. Last year, the discount operator launched a new Marketside grocery concept that averages 15,000-squaref-feet. So far, Walmart opened four such stores. Meanwhile, some traditional Walmart stores, which average approximately 107,000 square feet in size, can fit within larger big boxes. Overall as of Oct. 31, 2009, Walmart opened more than 50 net new stores in the U.S.

Some supermarkets have shown interest in larger spaces as well. For example, Elizabeth, N.J.-based ShopRite Supermarkets plans to open an 80,000-square-foot store in New Rochelle, N.Y. at the site of the former Home Depot Expo in the first quarter of 2010. The retailer has also agreed to take over a former Linens ‘n Things spot at Midway Shopping Center in Scarsdale, N.Y. ShopRite is interested in spaces ranging from 55,000 square feet to 85,000 square feet and often takes over second generation locations.

Discount rates

Given the abundance of available supply, these tenants drive hard bargains, the brokers note. To begin with, they want to sign shorter leases—typically for a 10-year term, with various early exit options, notes Mehran Foroughi, senior vice president with Colliers International, a commercial real estate services firm. In the past, many category killers would sign 20-year leases.

They also want lower rents—according to Marcus & Millichap and CoStar, average rents for big box space declined nearly 5 percent from the third quarter of 2008 to the third quarter of 2009, to $11.04 per square foot. In reality, however, landlords desperate to fill space are agreeing to lower rents by up to 30 percent, according to Spiegelman. And if the new tenants have enough cash to pay for the store build-out without a large tenant improvement allowance from the landlord, they are pretty much writing their own deal terms, adds Graiser.

“In those cases, they are able to drive tremendous deals because landlords don’t have the cash” for construction, Graiser says.

Meanwhile, in markets with weak retail real estate fundamentals and a huge pipeline of supply, discounts on rents can reach up to 50 percent compared to what tenants were willing to pay two years ago, says Kit Graski, senior vice president in the Las Vegas office of Voit Real Estate Services, a real estate services firm. The Las Vegas Valley market, for example, went from having one or two big boxes in 2007 to around 50 empty big box stores at the beginning of this year. About 10 of those, including larger boxes formerly occupied by Mervyns department stores and some that belonged to grocery operators, were picked off by Kohl’s and by regional Hispanic supermarket chains. Virtually none of the vacant Circuit City or Linens ‘n Things stores have been taken, according to Graski.

Graiser notes some of the boxes in the 30,000-square-foot to 50,000-square-foot range might end up being sub-divided and leased to smaller tenants or be converted to non-retail uses. But it will be a while before we see any major pick-up in demand from traditional big box operators.

“If it’s owned real estate, we are still seeing a good market for that, but most of it is leased real estate,” he says. “In the smaller markets, we are going to look at vacant Circuit City, Linens ‘n Things and [Sam] Goody [boxes] for up to five years.”