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The Retail Real Estate Crisis (article)

Since the beginning of the year, there have been a slew of retail bankruptcies, including Limited Stores (January), Wet Seal (February), BCBG Max Azria (February), General Wireless dba RadioShack (March), hhgregg (March) and Payless (April) to name a few. For at least several of these companies, this is not their first time at the bankruptcy rodeo. General Wireless is in what bankruptcy professionals affectionately call a “Chapter 22” (filing for Chapter 11 a second time) as the successor to RadioShack Corporation, which had previously filed in February 2015. 

 

General Wireless is not the first retailer to file twice within a few years; just look at Sbarro which filed in April 2011 and March 2014, American Apparel which filed in October 2015 and November 2016, as well as Eastern Outfitters (the parent of discount chain Bob’s Stores and the outdoor retailer Eastern Mountain Sports) which filed for a second time in February 2017 after acquiring Eastern Mountain Sports out of the Vestis Retail Group’s April 2016 bankruptcy filing. 

 

Landlords may feel they can find new tenants easily. Real estate is a limited commodity; if Barnes and Noble is closing stores, no worries, Amazon is opening them. However, the rate of store closures is not remotely close to that of new store openings.   

 

The imbalance of stores opening to stores closing may be devastating to real estate developers and shopping mall operators. Fewer stores translate to reduced foot traffic at malls and shopping centers. This results in a domino effect. Less foot traffic means people spend less time at the mall, which in turn means less business for the smaller retailers. Do not be surprised if you start seeing major fast food and “fast casual” food vendors leaving the malls for a more neighborhood-friendly environment.

 

What Can Landlords Do Now?

You see the signs. Rent is not being paid timely, month after month, and the excuses start rolling in. Do you have another tenant waiting in the wings? If you do, great; out with the old and in with the new. However, that is not always the case and even less so these days. And the process may take a while and be costly. 

 

Landlords may want to consider negotiating with tenants. If the tenant has already filed for bankruptcy, you have remedies available to you. As a landlord you have the right to file a proof of claim with the bankruptcy court for losses in addition to unpaid rent. Was the lease assumed or rejected? What are your remedies? What are your responsibilities? The formulas can be complicated and the deadlines are short. This is when you want to bring professionals onboard who have the knowledge and knowhow to assist you with filing your claim.

 

What Can Tenants Do Now?

You see the signs. Cash flow has become a concern and it is becoming more of a challenge to make timely rent payments. Do you want out of your lease or if your lease is renegotiated, can you afford to stay? Talk to your landlord to explain the situation. See if something can be worked out. Maybe it is a short-term problem, or maybe the rent is a cost your business cannot sustain. Consider consulting with experienced professionals who can help you find cost savings and turn your business around.

 

Short-Term Trends

Just in case you are thinking this is the end of the retail filings for the year, it appears as though other retailers may follow suit shortly, including rue21, GameStop, bebe, Gymboree, Nine West and, of course, Sears. Even Macy’s, with its flagship Herald Square location in New York City, is closing stores and reducing its footprint.

 

Given the competition from e-commerce, it is no surprise that investors remain cautious. Online retailing and innovations like same-day delivery, subscription boxes and “clicks to bricks” formats are disruptive factors.

 

A few trends can be anticipated:

 

Retail footprints will likely be smaller. Self-checkout kiosks are already old hat. “Smart” stores offer time-saving checkout features like the automated “virtual cart” that eliminates checkout counters and queues. Amazon’s brick and mortar time saver, Amazon Go, lets shoppers simply walk in, grab items and walk out.

 

Temporary locations may be more popular. “Pop ups” can give retailers a chance to leverage social media hype while testing the market for creative concepts. Landlords will be happy to collect rent on vacant properties while showing off the space to potential longer-term tenants.

 

Bottom Line

Clearly the retail sector is facing an enormous challenge. Retailers and their landlords should factor the trends facing the industry into their decision-making, particularly when it comes time to renew leases. Consumer needs are changing, and traditional shopping center and mall tenants and landlords may need to be innovative with their in-store and online approach to meet new demands.

 

If sales are steadily declining, retailers may want to consider proactively working with a professional who is experienced with corporate recovery services. There may be solutions other than filing for bankruptcy that can help stabilize operations, address cash flow issues and manage vendor relationships.

 

About the Author:

Blanche Zelmanovich is a Managing Director in CBIZ’s Corporate Recovery Services practice in New York and is a Certified Insolvency and Restructuring Advisor. She has advised clients for more than 15 years in litigation support and restructuring matters. She can be reached at bzelmanovich@cbiz.com or (212) 790-5879.

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