Bankruptcies, Bank Failures Haven't Dented Retail Real Estate's Recovery Just Yet

Several prominent retailers have filed for bankruptcy and three of the biggest bank failures in U.S. history have taken place in the past few months, but none of that has yet blunted demand for retail space.

Although consumer retail spending dropped slightly in February and March, retail landlords showed optimism discussing their first-quarter earnings, with many reporting rising rents amid high demand and guarded optimism that the sector — which had so long been the laggard among commercial real estate asset classes — will be the standout performer this year.

“Do we see any slowdown? I think the quick answer is, no,” Macerich Senior Executive Vice President for Leasing Doug Healey said during the REIT's earnings call last week. “If you think about pre-pandemic, there are a lot of retailers that were struggling, many failed, most failed during the pandemic and those that came out of the pandemic came out very, very healthy.”

Overall, retail landlords remained unflustered by the bankruptcies hitting large retailers including Bed Bath & Beyond, Party City, Tuesday Morning and Christmas Tree Shops. Executives for Brixmor Property Trust, which had 19 Bed Bath & Beyond locations at the end of 2022, voiced cautious optimism due to sticky demand for space.

“We fully expect that recent retailer bankruptcy announcements will result in occupancy pressure as we move through this year,” Angela Aman, Brixmor’s executive vice president and chief financial officer, said on the call, later adding that outside of bankruptcy, the REIT’s portfolio had “very high retention rates.”

Other landlords with Bed Bath & Beyond space are expecting to fill space fast. Average rents at Federal Realty Investment Trust spaces previously occupied by the retailer are around $15 per SF, CEO Don Wood said during the REIT’s Q1 call.

“The Bed Bath bankruptcy filing news, while not exactly welcome, was inevitable,” he said. “There are many more productive retailers than this one that should be serving our customers. Deals are in the works for all of our Bed Bath boxes and replacement rent should start to ramp up in late 2024.”

Regency Centers executives said on the company's earnings call that five of the 10 Bed Bath & Beyond leases in its portfolio were rejected as part of the bankruptcy, affecting $2.5M in future rents. It nevertheless revised its expected earnings upward, even accounting for a possible full liquidation of the bankrupt retailer.

"Our teams have been proactively engaged on all of our Bed Bath locations with potential backfill tenant in anticipation of the opportunity to recapture and remerchandise the stores," Regency Centers Executive Vice President of National Property Operations Alan Roth said. "We are not afraid to get spaces back in an environment of limited new supply growth and a surplus of great retailers that are actively looking to expand."

The pent-up demand has allowed landlords to push rents higher. Kimco signed 600 leases during the quarter spanning 4.5M SF, pushing up pro-rata rent rates for new leases by 44% and renewals and options by almost 8%. Simon Property Group reported average base rent rising over 3% year-over-year, with occupancy up 1.1%. 

“The dwindling availability of space is proving a boon for retail landlords as tenants scramble for any available space,” Piper Sandler Managing Director Alexander Goldfarb wrote in his analysis of Kimco’s Q1 performance. 

Grocery tenants continued to fuel retail landlords’ success, with four grocery deals driving growth for Federal Realty and generating $3.3M in base rent. Kimco, too, credited its combination of “high-quality grocery-anchored assets” and “off-price retail and everyday essentials” — as well as sports, fitness and health, and fast-casual dining tenants — in sought-after suburban locations for the landlord’s Q1 growth.

Shopping centers with grocery anchors did a lot better during the pandemic because they were necessity-based, while malls suffered because rents were high and enclosed spaces were unappealing to shoppers living through an airborne pandemic, Jefferies Senior Analyst for the US REIT Team Linda Tsai said. Now, with demand generally holding steady for retail space across the board, there’s even some optimism around malls.

“Pent-up demand, savings that people had ... malls have had a decent comeback, but they're still not really back to their pre-Covid levels,” she said.

The type of business that can be a helpful anchor tenant is also changing, experts said at Bisnow’s national retail conference last month, with sporting goods stores, off-price retail and medical proving to drive foot traffic to retail centers.

“We've been talking a lot about what an anchor tenant is, and trying to be a little more expansive and thinking about it,” Shopcore Properties Chief Transaction Officer Jessica Zaski said at the event. “You do actually start to see that fitness tenants, food and beverage, as well as some of the actual boxes like TJ Maxx or Burlington, which are home goods and sort of a treasure hunt — they don’t have all their inventory online, it changes week to week — all these things actually drive very regular and frequent visits.”

Kimco CEO Conor Flynn said the REIT had seen its deals spread across off-price, grocery, sporting goods, fitness, health and wellness, medical and fast-casual dining, while Simon Property Group CEO David Simon cited tenants like Dick's Sporting Goods and Life Time Fitness as “the best of the best shields.”

“All the cash flow from the strip center that's derived from the small shop leasing — the nail salon, the SoulCycle, the Chipotle — that's where all higher rents come from, but if you have a really good anchor, that will drive the small shop leasing,” Tsai said. 

But optimistic outlooks for the sector remain tinged by the previous crises it has survived, from the Great Recession to challenges from e-commerce and the pandemic, with owners looking ahead to future crises as they try to determine how long-term demand for brick-and-mortar space will settle. Owners facing upcoming maturities could struggle, depending on the exact type of retail space, rents and the refinancing market.

Executives at PREIT said they were reviewing options for Cumberland Mall, Woodland Mall and Cherry Hill Mall and are looking to sell two other malls to generate cash with $995.8M in debt due to mature in December and just $117M cash and credit on hand, The Courier-Post reported.  

Federal Realty is also mulling extension options for upcoming loan maturities, potentially pushing off a 2024 repayment to 2026 through one-year extension options, Daniel Guglielmone, the REIT’s executive vice president and chief financial officer, said on the earnings call.

Other owners voiced caution about future moves, choosing to focus on their existing properties rather than new acquisitions. Simon Property Group has spent more than $8B on upgrades and new developments over the last few years, and it is now focusing on making those investments pay off rather than looking for new opportunities, CEO David Simon said on the earnings call. It's looking to spend $1.5B on new mixed-use developments over the next five years.

“We're not jumping up and down to do external transactions. So it's mostly the same stuff that we've been doing and just keep plugging away on that,” Simon said. “The capital markets are telling all companies to be more prudent, to do more accretive investments, and we are listening very closely to that.”

The impact of the regional banking crisis had yet to hit as retail landlords pulled together their Q1 numbers. The collapses of Signature Bank, First Republic and Silicon Valley Bank, which were the principal lenders to some smaller retail tenants, still cast shadows over some of the retail optimism as retailers and landlords wait for the final impact.

“We would anticipate that [small shop tenants] would be the one that would be most impacted by the pullback of local and regional banks and their ability to lend,” Ross Cooper, president and chief investment officer at Kimco Realty, said during the earnings call.

So far, activity hasn't been affected, several executives said, leaving open the possibility to impacts that have yet to be felt.

“It's something that we're closely watching and monitoring through the course of this year to anticipate — see if there's any cracks in the system," Cooper said. "But right now, things are holding up pretty well.”