[M II A II R II K]

Big-Box Space Remains Hard to Fill


June 12, 2012

By KRIS HUDSON

Read More: http://online.wsj.com/article/SB1000...149495478.html

Close to a year after Borders Group Inc. collapsed, suburban shopping centers still are struggling to fill the vacated big-box space—and to cope with changes in the way Americans shop. Many shopping centers that lost Borders after the chain announced its liquidation are suffering high vacancies, falling rents and even debt defaults. Values have been falling in particular for the suburban shopping centers that rely heavily on big-box stores and have been bearing the brunt of the impact from online retail competition.

Take the case of the Regency Park Shopping Center, outside of Kansas City, Kan. The former Borders store there stayed shuttered for months, and when its landlord—Dallas-based real-estate investor Henry S. Miller Cos.—finally filled it with a Natural Grocers, the rent was "significantly lower," said Greg Miller, a senior vice president. By then Regency Park had defaulted on its $25 million mortgage. The center has a vacancy of 30%, and its value had declined to $9.3 million in December, from $32.8 million in 2006, according to loan data provided by Trepp LLC, a debt-analysis firm. "It's been a two-steps-forward, one-step-back deal," Mr. Miller said.

A new survey of 205 closed Borders stores shows that one-third are still vacant, according to brokerage Colliers International. Those stores that filled the former Borders space are leasing at rates roughly 30% lower on average than what Borders paid, Colliers said. "Some landlords have been reluctant to, in effect, take the lower rents that retailers are offering [to pay]," said Mark Keschl, Colliers's national director of retail brokerage. "Now that they're going on sitting vacant for roughly a year, we think landlords will be a little more practical." Some popular malls and downtown shopping areas have been able to replace Borders without cutting rents thanks to their locations and appeal to residents and tourists.

But many big-box centers that depended on stalwarts like Borders, Best Buy Co. and Office Max have suffered higher vacancy, weaker cash flows and other problems as these retailers have closed or shrunken stores. After the Oaks Square Shopping Center, in Gainesville, Fla., lost its Borders, other tenants demanded rent decreases to make up for the fact that their big-name neighbor had gone dark, according to Trepp. The landlord, Retail Property Group, replaced Borders early this year with shoe seller DSW Inc., DSW +2.31% but the servicer overseeing the center's $14.6 million mortgage started foreclosure proceedings last February. Retail Property, which has sued the servicer in an effort to pay off its loan at a reduced amount, declined to comment.

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