With So Many Vacant Stores, E-Commerce Is Only Part of the Problem

Date: Monday, July 22, 2019
Source: The Wall Street Journal

Barneys’ fight with landlord is an extreme example of an issue bedeviling many retailers: high rents

Don’t blame all the vacant stores on e-commerce. Sky-high rents are squeezing retailers, too.

Although commercial retail rents are down from recent peaks, they haven’t fallen as fast as sales at struggling chains. The rents remain higher than prerecession levels in many prime shopping areas such as Manhattan, Los Angeles and Dallas.

In a high-profile example of this tug of war, Barneys New York Inc. has hired restructuring advisers and is considering several options including a possible bankruptcy filing, as it seeks to renegotiate the lease on its Madison Avenue flagship and other locations, according to a person familiar with the situation.

The landlord raised the annual rent on the Madison Avenue store earlier this year to $27.9 million, from $16.2 million, this person said. Barneys fought the rent increase but lost during an arbitration proceeding. Reuters earlier reported that Barneys had hired restructuring advisers.

The retailer also is looking at whether it makes sense to reduce the size of the 260,000-square-foot store, and it is reaching out to potential investors who might be willing to inject cash into the company, the person said. Hedge-fund manager Richard Perry owns the majority of Barneys with a roughly 70% stake.

“Compared to a decade ago, rents are still up considerably—and for some retailers, it’s too much,” said Nicole LaRusso, director of research and analysis at CBRE Group Inc., a commercial real-estate company.

Landlords say it isn’t that simple. They argue retailers fueled demand with a flood of store openings coming out of the 2008 recession. And even when the landlords dangle lower rents, it is hard to tempt retailers to open stores when they are retrenching.

“We’ve cut rents by 30% and are offering all sorts of concessions, but we still have vacant space,” said William Friedland, a principal with Friedland Properties, which owns commercial real estate in Manhattan.

In other cases, though, landlords have an incentive to leave space vacant because slashing rents would violate their loan agreements, industry executives said. Moreover, any devaluation of the property would make it harder for them to borrow in the future.

“For these landlords, maintaining the valuation on their properties is more important than collecting an immediate rental stream,” said Richard Johnson, a partner in Odyssey Retail Advisors, a consulting firm that works with retailers and landlords. “It’s a waiting game, and many landlords would rather wait it out, hoping the market improves.”

Commercial rents in San Francisco are up 53% from a decade ago, and in Miami they are 46% higher, according to CBRE. Even in smaller cities, such as Nashville and San Jose, Calif., rents are up by nearly one-third.

In Manhattan, the average annual rent more than doubled from the beginning of 2010 to the end of 2014, peaking at $1,111 a square foot, according to CBRE, as Amazon.com Inc. and other e-commerce players were changing traditional shopping habits.

Some chains wound up paying as much as 30% of their sales in rent, double the historic norm, industry executives said. “At that point you are on your deathbed,” said Nina Kampler, a consultant who works with retailers looking to reduce their store base.


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