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Landlords 'Are Sitting There With Their Mouths Watering' When Big-Box Tenants Leave

Landlords 'Are Sitting There With Their Mouths Watering' When Big-Box Tenants Leave
Goodbye, Sears. Hello, Topgolf?

As big-box and department stores like Sears, Macy’s and Kmart close, landlords are divvying up vacated space to please smaller, more modern retailers — known as "rightsizing" — according to a Colliers International Q4 retail report for Miami.

These property owners are not crying about the death of retail, they are cheering.

"I think the landlords are seeing this as a huge opportunity," Colliers Senior Vice President Russell Bornstein said. "These are large properties, with very old leases, very below-market leases. So landlords are sitting there with their mouths watering."

"Resizing or 'rightsizing' is the word for the current year," the Colliers report states. "Strategically 'rightsizing' retail space has been crucial for landlords, as there are a lot more tenants looking for 10K SF or less than there are looking for 30K SF or more."

That means spacious department stores can be reconfigured to house multiple tenants. That is evident in deals like a vacated Biscayne Boulevard Kmart that has been leased to Ross, Burlington Coat Factory, Michael's and PetSmart. 

"If you had a Kmart leased up 60 years ago at $2, $3 a foot, and the landlord can split that and do a TJ Maxx, Marshall's or Hobby Lobby at $12 to $19 a foot, that's a huge windfall," Bornstein said. "I don't think those [department] stores have been helping the shopping centers or the adjacent stores for years. No peripheral is looking to go next to a Kmart."

New tenants, he said, can rejuvenate a whole shopping complex. 

Despite some developers shunning national chains in favor of trendy authentic or independent retailers — Little River developer Matthew Vander Werff has said he handpicks tenants, and Armando Codina said during a Bisnow event last week that Downtown Doral favored a local coffee retailer over Starbucks — numbers show that there is still plenty of demand for major brands.

"Let me tell you, the credit of those tenancies is outstanding, so maybe the developer does not want them, but the lenders want them and the lenders drive the bus," Bornstein said. 

The death of a Kmart may not be cause for glee in more rural or suburban parts of the country, Bornstein said, but South Florida's growing population and land scarcity keep sites in high demand. 

Despite the rise of e-commerce, the retail market in South Florida has been strong, with vacancy rates hovering around 3% since 2014, and rental rates at historical highs, the Colliers report said. Asking rates on triple-net-leased space in Miami-Dade County are $38.70/SF, it said.

The report predicted continued strength in the retail sector, even though vacancy rates have started to rise in Brickell, and there is currently more than 3.5M SF of retail space under construction in South Florida. 

"Industry dynamics continue to sort players into winners and losers, with weaker physical stores falling victim to more innovative retailers both on- and off-line," according to the report. "Expect another wave of store closures and bankruptcies after the holidays and into 2018."

One twist: experiential entertainment facilities could fill up empty chain store locations. The report cited the case of Topgolf, a bar/restaurant/driving range that recently opened a Miami Gardens location and is set to open a second facility, a 65K SF venue in Doral.