Retail Closures ‘Proving To Be An Opportunity’ As Landlords Backfill At Higher Rents

Big Lots is one of many large-format retailers closing stores, but at the Cudahy Plaza shopping center in Los Angeles County, the retailer’s pain turned out to be the landlord’s gain.

Owner Brixmor Property Group leased the former Big Lots space to Sprouts Farmers Market, which opened Feb. 16 and was one of a series of new tenants the REIT has landed in recent months at higher rents than the previous occupant. 

“Bankruptcy is proving to be an opportunity across our portfolio, as our team delivered rent growth of 60% on the recaptured space we executed leases on in 2023,” Brixmor Property Group Chief Operating Officer Brian Finnegan said on his company’s earnings call this month. 

The retail market saw hundreds of anchor tenant closings over the last year from Bed Bath & Beyond, Buybuy Baby, Rite Aid and Party City, and the hits have kept coming this year. Macy’s announced Tuesday it plans to close 150 stores over the next three years. 

But for Brixmor and other major retail owners like Simon Property Group, Kimco Realty and Macerich, these closures have actually helped them improve their portfolios over the last year, either by backfilling an anchor to a more appealing tenant at a higher rent or using the closure of a mall’s department store to launch a redevelopment. 

“We're putting in much more attractive merchants, much more diversified uses that will draw traffic and better sales volumes at better rent levels,” Macerich Chief Financial Officer Scott Kingsmore said on the company’s earnings call this month.  

Last year saw an 80% year-over-year surge in retail closings, CBS reported, with more than 4,600 locations shutting their doors. Bankrupt Bed Bath & Beyond shuttered 866 locations, Tuesday Morning closed 463, Rite Aid, which also filed for Chapter 11 bankruptcy, closed 335 and CVS closed 300. 

Anchor stores that were under long-term leases vacating early allows their landlords to raise the rents in line with the market at a time when supply constraints are giving owners leverage, executives said on earnings calls. 

Shopping centers in the U.S. were at 5.3% vacancy at the end of the year, according to Cushman & Wakefield, a record low since the brokerage started tracking the data in 2007. Asking rents have risen consistently since 2019, and at the end of 2023, they were up 16.9% over 2019 levels and up 4.1% from the previous year.

New York-based Brixmor has seen strong interest and rent growth as it backfills its Big Lots stores.

“The rents on those spaces are less than $8[per SF]. We’ve been signing anchors at a record last year of over $15,” he said. In addition to the Los Angeles County location, he said the company just leased a Big Lots space in Naples, Florida, last quarter at close to double the previous rent. 

“So we feel as though we’re well positioned for some tenant disruption this year, which is in our forecast, and well positioned to backfill it accretively at much higher rents,” Finnegan said.

Overall, Brixmor executed 3M SF of new leases in 2023, on which it was able to increase rents on comparable spaces by 40%, the REIT said in its fourth-quarter earnings report. Finnegan said the company’s big-box vacancy is at a record low. 

Kimco Realty Corp. leased up six anchor stores where leases were expiring with no renewal options last quarter at a “high double-digit mark-to-market adjustment,” Chief Operating Officer David Jamieson said on its earnings call.

“Second-generation inventory is really where the opportunity is to push rents today,” he said. 

Kimco is also seeing double-digit rent growth in its former Rite Aid locations that it is backfilling. Jamieson said the pharmacy closed five of its 21 locations in the company's portfolio last year and expects another five to close this quarter.

The New York-based REIT is watching its exposure to Joann Fabrics as the fabric and craft store rightsizes, and Jamieson said the company is trying to get in front of pre-leasing those spaces and, in some cases, upgrading tenants. 

“You do have on the other side of the spectrum, high-quality investment-grade tenants that are looking to grab space. So they're also becoming more aggressive in that regard,” he said. 

Because the retail construction pipeline has been slow for years, when big-box stores are emptied they are quickly backfilled, JLL said in its end-of-year retail outlook. Over the last six years, craft store Hobby Lobby backfilled 43 spaces, Burlington backfilled 54 and Target backfilled 31 big boxes, JLL found. 

“A prime example of this is the swift backfilling of space vacated by recently bankrupt Bed Bath & Beyond,” the JLL report said.

Brixmor’s Finnegan said retailers were “aggressive” in bidding on former Bed Bath & Beyond space last year.

Jamieson said Kimco’s Bed Bath & Beyond portfolio saw "robust" backfill activity during 2023. 21 of its 29 stores are occupied with leases consistently around $55 to $60/SF. Kimco executed leases on four locations during Q4 with a 57% blended, pro-rata rent increase, it said in its earnings report. 

There’s so little new product coming onto the market that retailers are increasingly flexible in taking whatever space is available, especially for big-box product, Kimco’s Jamieson said.

Simon Property Group President and CEO David Simon said on the company’s earnings call that the mall giant is also seeing rent increases across its portfolio. 

“Supply and demand is in our favor,” Simon said. “[There is] historically low supply in big properties across the country. I mean, there used to be 40M SF of retail real estate built every year. Now, there is essentially less than a few million here and there.”

Macerich’s Kingsmore said on the Santa Monica, California-based REIT’s earnings call that the company has leased 2M SF, including over 20 anchor locations, since 2021. 

“In all candor, we're running out of large-format inventory, running out of boxes, big anchor locations,” Kingsmore said.

As department stores continue to close big-box stores at malls, sometimes shifting to small store formats with 30K SF or 40K SF, landlords are using those closures as opportunities to bring new life into a property. 

Last summer, Nordstrom announced it would be closing 15 stores in the U.S. and Canada. A month later, the upscale department store said it would close its 312K SF San Francisco flagship. 

Macerich CEO Tom O’Hern said on the earnings call he expects more department store closures ahead, but he sees those looming vacancies to be easy backfills. The company replaced a 222K SF Nordstrom in a Phoenix suburban shopping center with a Scheels Sporting Goods, which opened last fall. 

Macerich, which owns 46M SF, predominately made up of its 43 regional town centers, is also using the department store vacancies to branch out into various types of uses, providing non-retail amenities to lure in shoppers. 

Malls across the country have turned vacant department stores into pickleball courts, apartment buildings and ice rinks. 

“We're going to continue to see different types of uses, diversified uses, taking the department store space and converting that into other uses that frankly drive more sales and traffic,” O’Hern said. “That's a trend we've seen accelerating over the last five years and that is going to continue as we go forward.” 

Simon Property Group has a similar goal, with plans to spend hundreds of millions of dollars on mall redevelopments this year. 

“The redevelopment of our department store boxes are probably the most interesting and exciting things that we're doing on the ground,” Simon said. 

The hundreds of stores Sears has closed since it filed for bankruptcy in 2018 presented an opportunity for the mall properties, he said. 

Simon is redeveloping a 162K SF Sears and its parking lot at its Brea Mall in Brea, California, into a mixed-use community with 380 apartments, outdoor shops and restaurants and a fitness center. It’s also replacing a Sears in Pittsburgh with a Dick's House of Sport.

“If anything, as we’ve gotten those boxes back we’ve made the center better,” Simon said. “We don’t look at box, the changes in box, as a concern. We view it really more aggressively and progressively.”