Borders Liquidation Will Hit Power and Strip Center LandlordsJul 20, 2011
The Great Recession has claimed another big-box retailer—two years after it was declared over.
Unable to secure a buyer interested in keeping it as a going concern, Ann Arbor, Mich.-based bookseller Borders announced plans to liquidate its remaining locations late Monday. DJM Realty, which is part of the Gordon Brothers Group, became the stalking horse bidder for Borders’ assets, and will now begin disposition work on Borders’ entire remaining portfolio. It includes 259 full-line Borders locations and 114 Borders Express and Waldenbooks stores.
Borders was brought to the brink by increased competition from digital readers, combined with several years of declining sales due to a weak consumer environment. Its mega stores were also saddled with too much music- and video-related merchandise and not enough products aimed at the typical mid-income American consumer, according to Cynthia Groves, senior managing director of global corporate services with Newmark Knight Frank, a real estate services firm.
Though a Borders liquidation isn’t welcome news for retail landlords, many of whom are still dealing with wobbling fundamentals, it won’t have nearly the same impact as the liquidations of Mervyn’s, Linens ‘n Things and Circuit City a few years earlier. Many of Borders’ landlords are already having conversations with alternate retailers to backfill its stores, says Andy Graiser, co-president of DJM Realty.
Borders owns some prime real estate and the last of its stores represent the best of its portfolio: locations in big markets, with good demographics and steady shopper traffic. Borders superstores average 24,500 square feet in size and can range from 10,000 square feet to 40,000 square feet. They feature long-term leases, typically lasting 15 or 20 years, with multiple extension options. Overall, the current disposition portfolio totals about 10 million square feet of space.
As such, Borders’ liquidation will impact the overall retail vacancy rate in the U.S. by less than 1 percent, according to Chris Macke, senior real estate strategist with the CoStar Group, a Washington, D.C.-based research firm.
The biggest issue for landlords will be disposing of two-level boxes, which are normally very expensive and sometimes impossible to retrofit, and dealing with a drop in rental rates as retailers who will end up taking former Borders locations will likely drive very hard deals, according to Chris Wilson, president of Wilson Commercial, a Los Angeles-based real estate services firm.
“You have to recognize that so many of the Borders leases were written or signed in high land value, very desirable at the time locations,” Wilson notes. “Many of those leases are way over market; especially the adjusted market for big boxes. So while there may be a lot of demand, the ability for the property owner to satisfy the market rents may further impact the timing of when those stores get absorbed.”
Lots of interest
Graiser says he expects plenty of interest from retailers in the Borders locations. Having witnessed multiple bankruptcies and liquidations over the past couple of years, expanding chains have been doing due diligence on the remaining Borders stores ahead of time, to ready themselves for a potential auction, he notes.
In fact, on Monday rumors emerged that Books-a-Million, the third largest U.S. bookseller after Barnes & Noble and Borders, was in negotiations with the retailer to pick up some of its stores. Books-a-Millions, like Borders, operates both superstores, which range from 8,000 square feet to 39,000 square feet, and smaller format stores, ranging between 2,000 square feet and 7,000 square feet. Most of its existing stores, however, are located in enclosed malls and strip centers, while Borders has gravitated more toward power centers and freestanding locations.
Books-a-Million would not return calls for comment and Graiser said he wasn’t at liberty to discuss any ongoing negotiations, other than to say that “there have been a few retailers that had conversations with Borders on taking some locations.”
Among the retail players most likely to go into the smaller Borders boxes would be the dollar stores, in Graiser’s view. Supermarkets and furniture sellers might be looking to lease the larger stores. It’s also a possibility that electronics chain Best Buy, which has been concentrating on opening stores in the 30,000-square-foot range, would be interested in relocating to vacant Borders boxes from some of its existing locations, according to Jeff Green, president of Jeff Green Partners, a Phoenix, Ariz.-based retail real estate consulting firm.
In addition, fast fashion retailer H&M might be looking at Borders stores, according to Steve McClurkin, senior vice president with brokerage firm Grubb & Ellis. Earlier this year McClurkin negotiated a deal for H&M to go into an approximately 20,000-square-foot Borders store in Carlsbad, Calif. McClurkin notes that the majority of Borders’ portfolio is made up of desirable real estate that should be quickly absorbed based on the quality of the assets and the market.
“H&M has been pretty selective in their growth in regards to urban markets and they are still aggressively expanding in the U.S.,” he says. “I am sure they are going to be looking at those locations throughout the rest” of the country.
Horizontal vs. vertical
Still, even with plenty of interest from alternate tenants, some Borders stores will likely go back to developers, Graiser says. During the last round of dispositions, DJM had a particularly hard time marketing multi-level Borders locations and brokers, including Graiser himself, expect that it will be no different this time around.
When Borders agreed to go into multi-level locations some years ago, it was a matter of necessity due to high land prices in certain markets, according to Wilson. Today, with plenty of empty one-level boxes still on the market, retailers have no incentive to pick up leases on multi-level stores.
“Many two-levels Linens ‘n Things are still vacant in A markets three years after they closed,” Wilson says. “The cost to retrofit them is very expensive and oftentimes, structurally very, very challenging.”
Graiser estimates that to re-lease a two-level Borders store to two retailers operating on separate levels, a developer might have to spend up to $1 million in construction costs. In certain instances, a retrofit might be impossible to undertake, either because the developer can’t get the necessary permits or because of the store’s layout.
“It’s still a challenge, I have to be honest,” Graiser says.
Of the 259 full-line Borders stores that DJM will be marketing, 43 feature a two-level layout and three feature a three-level layout. The remaining 213 locations are all one-level stores.
Dollars and cents
In addition, many of Borders’ landlords will likely take a hit on their incomes from lower rental rates even if they manage to secure new tenants, according to Chris Macke and Jeff Green.
Based on the average remaining lease term of 7.4 years on Borders stores, many of its leases were signed in the early and mid 2000s, near the peak of the real estate cycle. At the peak, in 2007, power center rents averaged above $20 per square foot, according to CoStar Group data. In the second quarter of this year, power center rents were down to $17.09 per square foot.
In prime markets like New York and Los Angeles and on older stores, retailers might be more flexible on rental rates because of lack of new development. Michael O’Neill, senior director with brokerage firm Cushman & Wakefield, has spent the past three months marketing a 35,000-square-foot, four-level Borders location in New York’s financial district. His team has received inquiries ranging from apparel retailers to drug stores to fitness club operators, some of whom would be willing to take the entire block of space.
The asking rent for the whole store would be around $3.5 million, with a 15- to 20-year lease term. O’Neill would not say how that rent would compare to what Borders used to pay, but the bookseller moved into the downtown Manhattan location back in 2002. It was the first big-box retailer to sign a lease in the area after the Sept. 11 attacks.
“There has been a substantial amount of demand since we brought that store to market,” O’Neill says.
On Borders leases outside major urban areas, however, “it’s going to be a huge challenge for retail developers to recoup those rents,” says Green. “Those who are expanding and could fill the boxes are driving some very hard bargains. The tenant is in the driving seat, not the developer.”