Shopping Centers a Revolving Door

Kmart Corp.’s plans to jettison hundreds of stores as part of its recent bankruptcy filing and Toys R Us Inc.’s decision to close several outlets reflect the ever increasing pace of change that has turned many shopping centers into revolving doors for retailers.

The turnover among tenants in shopping centers in Southern California and across the nation has grown over the years in the turmoil of intense competition and financial pressures, chain store mergers and an expanding supply of new retail space, according to retail and real estate industry observers.

The trend is expected to speed up even more in the year ahead as the recession forces more retailers to cut expansion plans and shutter stores. On Monday, for example, Toys R Us announced it would close more than 60 poorly performing outlets.

“We’ve have had more failures and more turnover,” said Brent F. Howell, a veteran retail real estate specialist at brokerage firm CB Richard Ellis. “These tenants tend not to stay the long term like they used to.”

Large pieces of retail real estate are always being recycled, and many a Southern California shopping center is haunted by the ghosts of retailers past, including Broadway, HomeBase and Montgomery Ward. Landlords were left in the lurch when the bank industry consolidated and shuttered thousands of branches, supermarkets opted for larger stores and drug chains built new outlets with drive-thrus.

Turnover “is an inherent risk in the retail business, and one that gives developers pause,” said Cliff Goldstein, a partner in J.H. Snyder Co., a Los Angeles-based development firm.

Real estate and retail observers are hard pressed to quantify the change in the pace of retail turnover. But there is a consensus that many chain stores are much quicker to pull the plug on locations that fail to meet financial targets or no longer fit into a new store format.

“In this world of firms being more scrutinized [by Wall Street investors], retailers are more proactive about closing stores than they were 20 years ago,” said Steve Sakwa, a real estate industry analyst for Merrill Lynch.

Turnover has become high enough to support a mini-industry focused on helping retailers dispose of their unwanted stores. Excess Space Disposition Inc. for example, has seen its listings of surplus store space grow 25% in recent years to about 20 million square feet in 1,500 locations nationwide.

“It is a big business these days as large chains merge, restructure and enter and leave markets,” said Rob York, a retail consultant at Fransen Co. “You don’t want to stick with a mistake.”

Store closings are usually associated with struggling retailers--such as Kmart, which filed for Chapter 11 bankruptcy protection last week, and defunct Montgomery Ward. But in an era of constant cost-cutting and intense competition, even the healthiest of chains are not hesitant about closing poorly performing or outdated stores. For example, ever-expanding discount retailer Wal-Mart Stores has about 400 stores for sale or lease.

“Most of these are properties that we outgrew and had to relocate to a bigger store,” said Peter Kanelos, a community affairs representative for Wal-Mart, which operates about 3,500 stores.

The aggressive expansion of big-box retailers and so-called category killers--such as Home Depot, Staples and Best Buy--eventually results in surplus space after they flood a market with new outlets, said Howard Makler, chairman of Excess Space Disposition. Not only do smaller retailers usually get crushed as rival chains battle for domination, but eventually one or more of the big-box retailers drop out of the market as well. That leaves landlords struggling to find ways to fill hangar-like stores.

The dwindling number of major chains means that landlords “don’t have many replacement tenants waiting the wings,” Makler said.

Owners of shopping centers in densely populated sections of Southern California have a better chance at recycling empty space than owners of property in outlying areas, say real estate brokers. With relatively few large building sites left in urbanized areas, retailers eager to expand often act quickly to take advantage of precious real estate left behind by failed rivals. Target Corp., for example, purchased nine former Montgomery Ward stores in Southern California last year after the retail giant folded.

“These things have a second life and a third and a fourth life,” said real estate consultant Larry Kosmont of retail property. “You don’t see them getting knocked down.”

As a result, most of the stores that might be vacated by Kmart, which has about 90 locations in Southern California, are expected to be acquired by another retailer, according to real estate and retail specialists.

In cases of poorly located store sites, property owners might have to turn to other uses--such as housing, schools or medical facilities--to fill the void. Kmart has said in court documents that it plans to break the leases on about 10 properties in the region.

Still, even under the best circumstances, landlords stuck with an empty Kmart would have to wait about a year before another chain retailer could reopen in the same spot. That could result in a major loss of rental income and put tenants in the same shopping center under financial pressure, leading to more vacancies.

Mindful of such potential disasters, many retail developers are careful about selecting properties, tenants and leasing deals that can insulate themselves from retail defections. Some firms avoid building structures tailored to meet the specific needs of a single big-box retailer. Others build only in proven urban locations where space can be filled relatively quickly.

Goldstein of J.H. Snyder said his firm once turned down an opportunity to build a shopping center adjacent to a Wal-Mart in Lakewood after each potential tenant wanted the right to break its lease if the giant discounter ever closed its doors. “It was not a risk we were willing to take,” he said.

In designing his shopping centers, Los Angeles retail developer Rick Caruso makes sure most of the store spaces are fairly generic in size and shape and flexible enough to accommodate new store formats and retailers.

“Retailers change the way they retail over time, and you have to be able to accommodate them or you lose them,” Caruso said.