Landlords may face loan trouble after Toys R Us closings

The Changing Landscape Of Retailing

What could the potential impact of selling or closing hundreds of Toys R Us and Babies R Us stores on the commercial real estate market in the U.S. be?

Currently, few retailers are expanding their bricks and mortar presence. Experts in commercial real estate are looking for this added supply of square footage to have a mixed impact on the real estate market, but are generally expecting the closures to push down market rates.

On one hand, landlords who have older leases with stores like Toys R Us in economically viable shopping areas, have the potential to find more profitable tenants. Other landlords will begin the scramble to find replacement tenants or to refinance and redevelop their property. The recent departure of big box stores such as K-Mart, Circuit City, and Sports Authority increases the amount of square footage available, reducing market rates even more. It is possible that some property owners will not survive an economic downturn.

At the same time, however, chains with stores like Homegoods. Ross and TJ Maxx are expanding their presence. Some of the closed big box stores are being redeveloped and divided into smaller retail outlets. This activity is keeping the commercial real estate market in a state of flux with market rental rates continuing to fall in some areas.

How long could this process of adjustment take? The time estimate from closing out one physical store to locating and negotiation with new tenants could take one and a half to two years, depending upon the amount of redevelopment required. Because of existing lease structures and commitments, along with declining demand for brick and mortar retail space, it could take even longer. One shopping center could be profitably redeveloped and another center nearby could simply fail altogether.

Regardless of the amount of time this process takes and who survives and who doesn’t, changes to the landscape of retailing will be with us for a long time.