3 Leasing Lessons Learned From Large Losing Retailers
When large chunks of occupied retail space suddenly go empty, portfolios can suffer tremendous pressure to remain viable. Many commercial real estate professionals can relate to this scenario all too well, considering the large numbers of stores in the last decades that have shut down or downsized.
With every failure, there are valuable lessons to learn. It follows, then, as time has recorded the demise or downsizing of brick-and-mortar stores like Borders, Radio Shack, Best Buy, and Office Depot, commercial leasing can glean much from these retailers.
In 1993, Amazon began its journey to the top as an online book retailer. Not only affecting physical bookstores like Borders and Waldenbooks, Amazon also affected the retail industry as whole. By the end of the decade and millennium, Amazon seemed to have created a seismic shift in most categories of retail by offering a plethora of consumer goods, overnight delivery, and product and pricing information on demand.
The Borders story tells a tale that encompasses all three lessons mentioned here: assess credit risk, be aware of competition, and know industry trends. Let’s look more closely at each in light of other closed or downsized retail examples.
- Credit risk
In many cases, signs of credit risk surface early in the commercial lease underwriting phase. When a large retailer presents at underwriting with signs of instability, it is wise to exercise caution moving forward with the process. Take a retailer like Radio Shack, a company that showed signs of falling market share as early as the 1980s. As discussed by Inc.com, hindsight suggests that RadioShack made multiple half-done attempts to meet the competition that did not have customer needs in mind. These “half-done failed attempts resulted in multiple re-branding initiatives, re-structuring of finances, and takeovers, which are all indicators of potential credit risk.
Strong commercial tenants will know their competition and make periodic adjustments to remain competitive within their industry. CRE professionals can glean the importance of this lesson from the downfall of Borders, a popular bookstore and cafe in the 90s. In a case like Borders, reaching both its highest and lowest points in the same decade, the bookstore and cafe model was not set up to compete with stores like Barnes & Noble and Amazon, both of which took online shopping to previously unheard of levels of success. Despite Borders’ attempt to gain an e-commerce advantage by contracting with Amazon to sell Borders books online, the 40-year-old company would file bankruptcy in 2011.
- Industry trends
Knowing industry trends when considering a commercial tenant is essential to the tenant screening process. Owners can open themselves to great risk without a solid grasp on how well a tenant’s industry has been performing and what industry experts are forecasting short- and long-term. For example, the “Amazon effect” would ripple throughout the retail industry at the turn of the century, impacting retail leasing even more after the recession. Physical stores like Best Buy, Office Depot, and the Gap would subsequently close its doors, downsize its holdings, or, in some cases, file bankruptcy to never recover in part due to industry trends.