The big news for Richmond-based Circuit City was the company's decision to liquidate its remaining 687 stores following a dismal holiday shopping season. But weeks before that, the electronics seller had a lower-profile setback that could have large ramifications for the retail real estate sector through 2009.
In mid-December, Circuit City canceled a planned auction of 154 leases due to lack of bidders. It's a signal that the market for excess space, once seen as a potential bright spot amid troubles in the sector, may already be oversaturated.
After the failed auction, Circuit City ultimately decided to break its leases as it opted for liquidation. Many retailers are suffering sales declines, closing stores and slowing the pace of expansion. That's creating a lot of excess space along with a shortage of potential replacements. While some segments of the retail industry are still growing — most notably discounters and grocers — there isn't enough overall demand to absorb the space that's coming to the market right now, especially in the mid-size big boxes Circuit City inhabits, notes Andy Graiser, co-president of DJM Realty, a Melville, N.Y.-based real estate disposition and restructuring firm that is handling Circuit City's portfolio. As a result, failed auctions of excess retail space could become a common occurrence this year, according to Graiser.
One of the issues that will affect the success of excess space auctions will be the rents the retailer vacating the space is paying. In Circuit City's case, the chain was paying market rates, which in the current environment seem inflated, says Graiser.