Retail wreckage piles up
National brands are continuing to topple, leaving landlords to contend with store vacancies — throughout the country and in the NYC metro area
UPDATE: Wednesday, Nov. 6, 2019, 3:20 p.m.: Discount retailers. Luxury department stores. Children’s stores. Home goods giants.
The retailers that filed for bankruptcy so far in 2019 — and those on experts’ watch lists — have spanned the spectrum.
And with an ever-growing list of stores in the red, the outlook for the real estate they occupy continues to be grim. While some retailers, like young-adult fashion chain Forever 21, plan to use bankruptcy filings to right-size real estate portfolios, others, like Payless, have opted to close hundreds of stores.
As of the beginning of last month, U.S. retailers had announced plans to shutter almost 8,600 stores, a figure far surpassing the number from last year — which saw the bankruptcy of big-box retailer Sears. And store closures are on pace to hit nearly 12,000 by the end of the year, according to data firm Coresight Research, a retail consultant.
“There are a lot of stores that are too big out there, there are a lot of stores that become redundant,” said Gilbert Harrison, founder of retail financial advisory firm Harrison Group. “We’ve been overstored for a long time.”
For those in the industry, it’s a tired story. “I don’t think anyone’s devastated or surprised,” said Carl Mattone, president and CEO of Queens-based CFM Development, who has built about 1 million square feet, mostly in New York. “It’s just the world that we live in.”
In New York, the retail market has been in the midst of a correction for some time.
In the third quarter, average Manhattan asking rents in 16 major retail corridors, from the Upper West Side to Downtown, dropped 5.7 percent year over year to $756 per square foot, according to CBRE. That came on the heels of a 4.5 percent decline the prior quarter. Rents along retail corridors like upper Madison Avenue (16.9 percent drop) and Broadway in Soho (14.9 percent drop) suffered the most.
The rental plunges come as parts of the city are seeing swaths of empty storefronts.
CBRE found 214 ground-floor availabilities across Manhattan’s 16 top shopping streets in the third quarter, down from the 2018 fourth-quarter peak of 230.
“New York is kind of bifurcated. The market today is resetting itself, and I don’t think anybody really knows where [it] is,” said Francis Greenburger, chair and CEO of developer and landlord Time Equities. (Greenburger said his New York portfolio has a retail vacancy rate of just under 10 percent, though he noted that ideally it would be around 3 percent.)
Outside the city, malls are feeling the pinch, as The Real Deal and others have long been reporting. Some experts predict that the number of U.S. malls, which now stands at roughly 1,200, could end up at just a few hundred once the dust settles.
That also means that major mall landlords will continue to take hits — even as sophisticated owners have taken proactive measures to buffer against major tenants collapsing.
Regional mall real estate investment trusts, for instance, posted annual losses of 13.5 percent, according to September data from Barclays.
Still, it’s not all bad news. While closures abound, retailers have so far said they would open about 3,600 stores this year, slightly more than last year’s 3,300.
And some reports have suggested that, at least in New York City, the retail vacancy problem has been overblown. The city, for example, conducted a study showing that while vacancies were up between 2008 and 2018, they did not increase by huge amounts.
In addition, tenants are taking advantage of the market.
“The tenant has a lot of control right now,” said Greg Tannor, executive managing director and principal at brokerage Lee & Associates.
As they do in tough markets, landlords are getting creative to fill space — whether it’s signing online-native brands or adding entertainment amenities to their properties.
The American Dream mall, which partially opened last month in New Jersey, will feature an indoor amusement park and ski slope, for instance. And Unibail-Rodamco-Westfield’s Garden State Plaza also in New Jersey, is getting a makeover that will include housing.
In addition, there’s demand from medical tenants and new food and beverage concepts, experts said. “The key to real estate — even if you heard this a million times — is location, location, location,” said Joseph French, a retail broker with Marcus & Millichap. “It may not be retail, but it will be something.”
Here’s a look at some of the retailers struggling the most.
Forever 21 may not be Forever after all.
The fast-fashion retailer filed for Chapter 11 bankruptcy in September.
The Los Angeles-based company, with 549 stores in the U.S. and another 251 overseas, said in its court filings that it did not have enough money to pay its vendors for the inventory it needs for the upcoming holiday season. It also blamed declining mall foot traffic and ballooning costs — the retailer was shelling out $450 million annually to stay in its stores.
The filing offered a glimpse into the family-run business, which had been controlled by husband-and-wife duo Do Won Chang and Jin Sook Chang since the company’s founding in 1984. Described in court records as the couple’s “American Dream,” at its peak Forever 21 was raking in more than $4 billion in sales annually.
But former employees and industry insiders told the New York Times that the Changs were reluctant to bring in outsiders to help with business decisions and that their micromanagement and overall keep-it-in-the-family ethos perpetuated the chain’s decline.
As part of its restructuring, the retailer announced that it would close 178 locations. Those closures include four outposts in Connecticut, 11 in New Jersey and 18 in New York state. Forever 21 will also be pulling out of Europe and Asia.
In the five boroughs, the brand’s Soho location at 568 Broadway — owned by Allied Partners, Aurora Capital Associates and A&H Acquisitions — will shutter, as will 490 Fulton Street in Downtown Brooklyn and its outpost in the Kings Plaza mall in Mill Basin, Brooklyn.
In the broader tristate area, Forever 21 sites in Short Hills, New Jersey; Stamford, Connecticut; and White Plains are also on the chopping block. Forever 21’s stores — generally considered “junior anchors” at between 20,000 and 40,000 square feet — may be more challenging to deal with, said Marcus & Millichap’s French.
“It’s a big chunk of space that’s going to be hard to fill,” he said. “Honestly, these landlords, the malls today are struggling for tenants … a box of that size, there aren’t a lot of players in that space.”
And some landlords will get hit harder than others. For example, Unibail-Rodamco-Westfield has 18 Forever 21 stores closing, including one at Garden State Plaza and one at the Sunrise Mall in Massapequa on Long Island.
Combined, mall REIT Macerich and Taubman Centers will see 26 stores shutter.
Meanwhile, those two, along with Simon Property Group, Brookfield Properties and Vornado Realty Trust, rank among the company’s 50 largest unsecured creditors. Forever 21 collectively owes those five mall owners $20.9 million, bankruptcy records show.
Taubman — which counted Forever 21 as its biggest tenant, accounting for 4.3 percent of its malls’ gross leasable area — told investors that it anticipated the shift and proactively took back some Forever 21 spaces. CEO Robert Taubman said the company recaptured about 5 percent of Forever 21’s square footage, including two large stores in China that have been re-leased. “There’s a lot of uncertainty. … But we’ll have to see, and it is a very fluid situation,” he told investors during a second-quarter earnings call.
French said the “smarter mall operators have already seen this coming.”
“They’re not shocked by it,” he said. “They’ve been looking for tenants to backfill this space.”
Payless ShoeSource filed for Chapter 11 in February — and not for the first time.
The discount-shoe company filed for bankruptcy just two years before, and re-emerged having closed 675 stores and shedding $435 million in debt.
But that restructuring wasn’t enough. This year, the roughly 60-year-old company closed nearly all of its 2,500 stores in the U.S., Puerto Rico and Canada, including about 30 in Connecticut, 80 in New Jersey and 150 in New York state.
In New York City, 27 locations were clustered in Brooklyn — including on Avenue J in Midwood, on Flatbush Avenue in Ditmas Park, in Prospect Lefferts Gardens and in Sheepshead Bay. Stores in Jersey City, Stamford, Port Washington and Westwood, in New Jersey’s Bergen County, were also among the shuttered tri-state area locations.
French said, however, that the company’s spaces won’t be as difficult to fill because they average only 3,000 square feet, according to A&G Realty Partners, which was hired to dispose of the locations. “It depends where they are … [but] they are a much more manageable size,” French said.
Still, Payless’ bankruptcy marks an epic downfall for the Kansas-based company, which was founded by cousins Louis and Shaol Pozez and at its peak had over 4,500 stores.
Payless — which was owned by private equity firms Blum Capital and Golden Gate Capital thanks to a 2012 leveraged buyout, then later taken over by a group of lenders including Alden Global Capital — cited production issues and an inventory oversupply among the chief reasons it needed bankruptcy protection. While its North American locations have been liquidated, the company has no plans to shut down its 790 international stores.
One source said the company’s heavy debt load — which clocks in at $450 million — is a result of its private equity buyout. That, he said, has led to its insurmountable financial woes.
“Payless Shoes didn’t fail because of e-commerce. Payless Shoes failed because of [private equity],” French said. “Private equity has killed more retailers than e-commerce.”
Barneys New York
Barneys is known for carrying designer brands — think $450 J Brand jeans, $1,500 Victoria Beckham boots and $3,000 Prada purses — that are unaffordable to the masses. But the department store chain could not afford its own rent.
And it has made no bones about that, attributing its August bankruptcy to rent hikes.
Ashkenazy Acquisition — the landlord at the store’s 275,000-square-foot flagship on Madison Avenue — slapped Barneys with the biggest increase.
Last January, the landlord, which bought the iconic building during Barneys’ first bankruptcy in the 1990s, increased the rent to $30 million from $16 million. The jump stemmed from a provision in Barneys’ lease that allowed Ben Ashkenazy’s firm to bump rates up to fair market value.
Lee’s Tannor said department stores are getting hit particularly hard by online competition because it’s more convenient to click and buy than to walk into a behemoth of a store. They also have slimmer margins because they’re selling a collection of brands from third parties. As a result, he said, they can’t handle escalating rents.
Barneys’ filing indicates that rents are out of line with “where the reality is,” Tannor said.
And Barneys’ bankruptcy made clear that it’s not just the mid-tier players hurting. “The luxury end of the market is suffering in general,” said Stephen Selbst, chair of the restructuring and bankruptcy group at the law firm Herrick Feinstein.
Neiman Marcus also has been hindered by a large debt load, and two years ago Ralph Lauren shuttered its flagship on Fifth Avenue.
While Barneys’ Madison Avenue store will remain open, the retailer plans to shut 15 of its 22 outposts. That includes its 10,000-plus-square-foot Co-Op on Atlantic Avenue in Brooklyn — which set a new bar in 2010 and paved the way for other national brands in the then-untested borough — and its Riverhead outlet store on Long Island. It’s also shuttering six locations in California.
The retailer counts some of its landlords among its biggest (unsecured) creditors.
For example, it owes Jenel Management Corporation, which co-owns 660 Madison with Ashkenazy and owns another Barneys Beverly Hills outpost, $5.98 million. It also owes Thor Equities, which owns its Chicago site, $2.23 million. That’s not to mention the fashion brands from Gucci to Prada that also have piles of unpaid bills.
Barneys also filed for Chapter 11 in 1996, partly because of a dispute with a Japanese retailer and department store chain it had partnered with, according to court records. The company re-emerged two years later.
This time around, Barneys is close to locking in a new owner. As of press time, Authentic Brands Group, which owns designers like Frye and Vince Camuto, appeared to be close to buying the luxury store for about $270 million.
The competition in the kids’ clothing world got the best of Gymboree this year.
The children’s store filed for bankruptcy in January and announced that it would close all of its nearly 800 Gymboree and discount Crazy 8 stores in North America.
Gap, however, bought Gymboree’s high-end children’s clothing line, Janie and Jack, and plans to keep those 147 locations open. And in October, the Children’s Place announced that it will reopen 200 Gymboree stores in select locations and online.
Gymboree was mostly located in malls. And the retailer’s bankruptcy filing provides details about some of the landlords and locations impacted.
The company, for example, owes Simon and Brookfield a combined $3.6 million in rent. Simon’s stores in the tri-state area include a Janie and Jack at Roosevelt Field Mall in Garden City, and Brookfield has a Gymboree at Bridgewater Commons in New Jersey. And among Taubman’s stores is a Gymboree at the Short Hills Mall, bankruptcy records show.
In general, unsecured claims, which most landlords file, are not prioritized in bankruptcy court, said Herrick’s Selbst. In the Sears case, “No unsecured creditor is going to get anything,” he said.
And in its initial bankruptcy filings, Gymboree provided no “cure” amounts to its landlords for breaking the leases.
One source, who works for a national landlord and asked to remain anonymous, said that owners get regular financial updates from tenants and take back space if they sense closures coming.
“Our leasing team has been very proactive to get in front of these bankruptcies,” the source said, noting that the landlord began taking back spaces from Sears in 2010, long before that company went bankrupt.
A landlord with a master lease for one tenant in multiple stores often has the upper hand, said bankruptcy attorney Brett Miller, managing partner of Morrison Foerster’s New York office. “That becomes harder for the company to just say, ‘Well I don’t want these three but I want the other 10.’”
Like Barneys and Payless, the Gymboree filing was the second for the company — its first was in 2017. At that time, it cut $900 million in debt and closed about 330 stores. But that gutting didn’t do the trick.
Discount women’s apparel store Charlotte Russe filed for Chapter 11 in February, and then kicked off liquidation sales at its 500-plus U.S. stores.
In the tri-state area, outposts at Danbury Fair, Stamford Town Center, Westfield Trumbull and Galleria White Plains were expected to close. That was in addition to stores across New Jersey, including in Wayne, Paramus and Livingston. In New York City, a store on 34th Street in Manhattan already shuttered.
But in April, after the closings commenced, Charlotte Russe tweeted that it, too, was staging a comeback, with plans to launch a new online presence and open 100 stores. It has since announced openings in places like Jersey City’s Newport Centre and the Brass Mill Center in Waterbury, Connecticut.
Still, the filing marks a reversal from just six years ago, when growing sales had the retailer considering an initial public offering. Mounting debt from a private equity takeover in 2009 — it was bought by Advent International — and declining sales shelved those IPO prospects.
Last year, the California-based company secured concessions from landlords and trimmed expenses. But sales continued to plummet, and in its bankruptcy filing it acknowledged that it failed to balance its e-commerce needs with its in-store expenses — a common land mine for retailers these days.
Bed Bath & Beyond
Also on the chopping block is Bed Bath & Beyond, which last month announced it would close 60 stores nationwide — a figure that’s risen from initial estimates.
The company, which has not filed for bankruptcy, hasn’t identified which stores it’s shuttering, but it has 58 outposts in New York state — including six in Manhattan and two in Brooklyn — plus 36 in New Jersey and 17 in Connecticut.
The New Jersey-based company, which has 1,534 stores (including offshoot concepts) in North America, has installed a new board and CEO and has plans to upgrade about 160 of its highest-volume stores. Meanwhile, it said, it will continue to negotiate leases with all of its landlords and is exploring sale-leaseback deals across about 4 million square feet of space it owns.
Pier 1 Imports
The home goods retailer also has yet to file for bankruptcy, but it appears to be on industry watchlists — this year, S&P Global Ratings said the company was on the brink of collapsing.
And Pier 1’s planned closures have gone from bad to worse.
In April, the Texas-based company said it would close 45 of its roughly 1,000 stores in North America. But it later revised that, saying it may shutter up to 15 percent of its entire portfolio.
The company has yet to release a store closure list, but its website notes that it still has five outposts in New Jersey, including two in Paramus and one in Jersey City. There are five others scattered throughout New York City’s outer boroughs, including at Vornado’s Rego Center in Rego Park, Queens.
Meanwhile, Pier 1 has signed on with A&G Realty to optimize its store footprint and renegotiate its rents. The retailer expects to close more stores as it continues those negotiations, interim CEO Cheryl Bachelder said in a September earnings call.
“We have been holding active discussions with our landlords and are continuing to make progress in realizing occupancy cost reductions,” she said. “We are encouraging those landlords who have not yet participated in discussions to work with us.”
Correction: A previous version of this article provided the wrong owners for Payless. Private equity firms Blum Capital and Golden Gate Capital had acquired the company in a leveraged buyout in 2012, but a group of lenders led by Alden Global Capital took over Payless during the firm’s first bankruptcy proceedings. The article was also clarified to specify that CBRE’s Manhattan rent figures cover just 16 retail corridors in the borough.