Brokers ponder fate of Kmart space: Kmart files for chapter 11 bankruptcy; store closings imminent.

Kmart filed for Chapter 11 bankruptcy protection last week in the largest retail bankruptcy in U.S. history.

Kmart is the nation's third largest discount retail chain behind Wal-Mart and Target.

An article in the New York Times reported that Kmart will keep all 2,114 of its stores open for now. Analysts said that several hundred stores will be closed once a corporate review is finished by the end of April.

Their two Manhattan stores are located on 34th Street between Seventh and Eight Avenues, and further south at Eighth Street and Fourth Avenue. Kmart operates eight other stores in New York City outside of Manhattan.

Retail brokers are now wondering what will become of these two formidable spaces.

"If the Penn Plaza space were put back onto the market, that would mean a lot to their landlord, Vornado," said C. Bradley Mendelson, executive managing director at Insignia/ESG.

Mendelson said that Vornado has a retail "master plan" along this corridor of 34th Street, and a Kmart vacancy could allow them to carry it out. Vornado, one of the city's biggest landlords, owns much of the commercial space around Madison Square Garden.

Wendy Kopsick, a spokeswoman for Vornado, said the company had no comment on their retail master plan here. Neither did she confirm the existence of such a plan.

Mendelson said that, in his view, Kmart was never the best discount store for the Manhattan market. He also questioned their cost of occupancy here, which must be "higher than anywhere else in the United States."

Maybe not, says another broker.

"They only pay $20 to $25 a foot at their Penn Plaza store, which isn't too high," said Robert K. Futterman, a retail broker who has been involved with 34th Street retail for years.

According to broker Faith Hope Consolo, a few other "big box" retailers have already taken a look at this space, and Target was one of them.

"Kmart filled a void here, even though they've had some problems recently," she said.

When Kmart entered the Manhattan market several years ago, many people questioned their tactics since Manhattan residents are a far cry from the suburban, car-owning public that Kmart historically caters to. Yet their Manhattan stores occupied a real niche, said Consolo.

Kmart employs roughly 275,000 people and has 2,105 stores in the entire nation. A bankruptcy attorney said that Kmart is probably analyzing all of their stores on a case-by-case basis, trying to determine which to close.

"They could offer their leases to one buyer, in what is called a block purchase," said Claude Montgomery, a principal at law firm Salans.

"A lot of the retail bankruptcies back in 1999 did this. Merry Go Round sold off their leases in a block," he said.

For Kmart to sell its leases at selected locations, however, the buyer would have to negotiate a comparable rent with the landlord. It is not a sublease, said Montgomery.

Another retailer--albeit a smaller chain-has also filed for Chapter 11. The Museum Company, which rents two stores in Manhattan, made the announcement two weeks ago, leaving the future of 673 Fifth Ave. up for grabs. Their other store is located on Times Square. "This Fifth Avenue space was sought after by other retailers in the past few years. Museum Company had some offers for the space," said Robin Abrams, a retail broker from Lansco.

The retail space is located on the ground floor of a seven-story, Class B building. Kingsville Investment, the prime leasing company, is not marketing the space yet. "We can't discuss it publicly until the bankruptcy goes through," said Micheal Buffard of Kingsville.