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Retail centers teeter on big-box stores.

Retail centers that re-let big-box space averaged a 54 percent vacancy rate compared with 28.5 percent for those centers with still-empty big-box spaces, reports Colliers International, Boston.

The company's report, Re-Tenanting Bankrupted Big Boxes: Paving the Way for Retail's Rebound, said that by January 2011; average vacancy rates for retail centers with vacated big-box space declined to 17.3 percent but remained more than triple the rate prior to when previous big-box spaces went dark. The paper said U.S. retail vacancies increased from 2008 through 2010, from 6.8 percent to 11 percent, representing nearly 400 million square feet returning to the market.

Retail gradually increased to more than $25 billion in distressed assets during the first quarter of this year and, in April, retail distressed properties grew 3.5 percent, or by $865 million, according to Real Capital Analytics Inc. (RCA), New York.

Michael Niemira, vice president of research and chief economist at the International Council of Shopping Centers (ICSC), New York, said sales advanced ahead of Easter and because of consumer demand for spring apparel, candy, food and "other holiday items."

He added, "Unfortunately, with rising fuel prices and consumers reporting more and more hardship as a result, the post-Easter lull may be accentuated."

Realpoint LLC, Horsham, Pennsylvania, said retail delinquencies in commercial mortgage-backed securities account for 24 percent of all CMBS delinquencies, second only to multifamily at 27 percent.

Frank Innaurato, managing director of CMBS analytical services at Realpoint, said a large amount of big-box exposure to shadow anchors in CMBS loans--not part of the CMBS collateral per se--have a direct effect on traffic at any given retail location, including regional or strip malls and power centers.

"Despite a leveling off over the past five months, we still consider retail delinquency a legitimate concern for 2011," Innaurato said. "A prolonged economic recovery could have further impact on consumer spending and cause retailers to continue to struggle. We also cannot rule out additional store consolidation, closings and potential bankruptcies along with growing balloon maturity default risk as retail collateral continues to suffer from the experienced decline."

Blockbuster Video closed 700 store locations in the past year; Borders closures added up to 226 stores with another 20 more on the way; and Best Buy, with a 16 percent first-quarter drop in earnings, said it could close some underper-forming locations and reduce store size.

Using the recent bankruptcies of Circuit City, Linens 'n Things, Mervyns and Gottschalks as a model, the Colliers report examined the recovery timeline and trade area characteristics of those retailers' individual locations as a means to help predict recovery behavior of future big-box vacancies.

In a sample of 1,259 store closings and 56 million square feet of vacated space from the former retail tenants, Colliers said vacated big-box space that occupied 60 percent to 90 percent of a retail center's total space took seven quarters on average to refill--nearly double the average of 3.7 quarters.

In locations where one of four bankrupt big-box tenants held less than half total center space, the likelihood of re-tenanting the vacated space was nearly 40 percent. Freestanding big boxes, however, averaged 2.9 quarters to lease again compared with 3.6 quarters for multi-tenant spaces, Colliers said.

"The retail sector is absolutely on the rise, marked by a flight to quality," said Mark Keschl, national director of retail for Colliers International. "The recent bankruptcies of these four retailers caused disruption, and there will likely be more pain along the way. Blockbuster and Borders are closing stores, and many other retailers are also pursuing strategic downsizings and closures. But what we see here is that underlying retail real estate with good fundamentals continues to attract tenants. The location and size of those spaces has a nuanced effect on how quickly they re-let."

Vacated, bankrupt big-box spaces also leased up faster in the most densely populated areas at 2.4 quarters compared with least densely populated areas at 3.4 quarters--nearly 100 days difference on average.

Bankrupt big-box tenants in Sun Belt states leased up faster than those in non-Sun Belt states, at 144 fewer days on average. In the most densely populated trade areas, Sun Belt locations averaged 1.7 quarters to re-let versus 4.4 for non-Sun Belt locations--a difference of roughly 243 days.

The paper said bankrupt big-box vacancies did not cause a ripple effect across centers they occupied. Retail centers are always at risk of a domino effect among vacating retailers -- as one leaves, others may follow. But landlords observed 1 percent in additional vacant square footage in centers that housed at least one of the bankrupted big-box tenants.

"This could be attributed to new players occupying space across the country in markets they did not previously have a presence in," Irmaurato said. "This includes home electronics and appliance retailers, such as hhgregg and Best Buy, competing with the discount retailers like Target, Wal-Mart and Costco. Retailers are also finding alternative uses for big-box space with tenants that might not normally fit into mall anchor/big-box space."
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Title Annotation:Commercial
Publication:Mortgage Banking
Date:Jun 1, 2011
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