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Toys ‘R’ Us-owned stores could be fertile ground for redevelopment

Wayne, N.J.-based Toys “R” Us Inc. announced Thursday that it would be closing all of its iconic toy stores, plus its Babies “R” Us stores, across the United States, leaving American landlords in the lurch.

The company, which has more than $5 billion in debt, locally owns half of its 14 stores in Wayne, Oakland and Macomb counties, according to property records and Washington, D.C.-based real estate information service CoStar Group Inc. That could mean ripe pickings for local real estate investors looking to get property on the cheap, although exactly how cheap is not known.

The appetite for the Toys “R” Us-owned properties — located in Livonia, Pontiac, Southgate, Sterling Heights, Westland, Madison Heights and Northville — will likely be contingent upon whether there are ground leases on them, said Alan Stern, vice president of brokerage services for Farmington Hills-based Friedman Integrated Real Estate Solutions LLC.

“Those are a little more difficult to do a purchase transaction on because you’re also negotiating with the individual who owns the land,” not just Toys “R” Us, he said. “It’s just another layer of hair that’s on it than just a traditional deal.”

He said he has a letter of intent to put a fitness center into about half of a 47,000-square-foot former Toys “R” Us in the Arborland shopping center in Ann Arbor, owned by Farmington-based Brixmor Property Group. His client is competing with eight others for the space, he said.

But the Toys “R” Us-owned stores could also prove to be fertile ground for redevelopment if another big-box user is not found, said Tony Schmitt, principal in the Bloomfield Hills office of Mid-America Real Estate Group, which focuses on retail.

“It will come down to whether there are there users,” he said. “It’s always easiest to find a user that’s going to take over the box. We have done work with Toys “R” Us in the past, and a lot of those boxes are in really good condition. Reuse of those buildings — usually they go through that layer first, and then you go to, ‘OK, if we can’t find anybody or the building is falling apart … ,'” then it makes sense to demolish it and build new on the site.

Schmitt, however, said there are retailers interested in back-filling Toys “R” Us stores, ranging from fitness centers to grocers.

“Toys “R” Us for the most part has some pretty good real estate. There is going to be pretty good demand to backfill the space. But how much they sell for based on the liquidation remains to be seen.”

Stern agreed. “It’s not going to be a problem backfilling these,” he said. “The Toys “R” Us stores are going to be very active because most of them are in good locations with good visibility.”

Some retailers have flocked to fill up vacated junior-box space in recent years, including Kroger Co., which has taken over several closed Kmart Corp. stores and Field & Stream, which now occupies the site of a former Circuit City store at Oakland Mall in Troy. The city of Westland took a rotting, 64,000-square-foot Circuit City and converted it into its new city hall. A former Kmart in Troy is now the site of a 16-screen MJR movie theater at Maple Road and Main Street in 2014. At Southland Center in Taylor, a former Mervyn’s department store site was turned into a 12-screen Cinemark theater.

Ken Nisch, chairman of Southfield-based JGA, a brand strategy and retail design firm, said some Toys “R” Us locations may face difficulty because the surrounding real estate markets have changed, such as for the store in Pontiac, which sits across from the closed and blighted Summit Place Mall in Waterford Township.

“There are too few viable and attractive users for that space … hence the mall,” he said. “Contrary to that, they have a location in Southfield with all sorts of opportunities that probably won’t be a big-box user … A lot of it is going to depend on the real estate relevancy or real estate irrelevancy.”

Landlords nationwide may have difficulty filling the individual stores as many big-box retailers struggle, Bloomberg reported.

The real estate effects go beyond just who fills the vacated space and how it will be repurposed.

CoStar estimates that nationwide, 735 Toys “R” Us stores encompass 29.3 million square feet, not including the 8.5 million square feet the retailer had closed or planned to close prior to Thursday’s announcement. It said closures could devalue the properties by $1 billion or so.

Data from New York City-based Trepp LLC says there is $4.45 billion of commercial mortgage-backed securities debt on properties that have a Toys “R” Us or Babies “R” Us store in them across 105 different CMBS loans.

Only seven of the loans are delinquent for a 3.42 percent delinquency rate on the total balance; 24 percent of the current debt is watch-listed across 41 loans, which doesn’t necessarily mean the loan is at risk of default, but instead that there is an uncertainty surrounding the debt, such as an upcoming maturity date or a lease expiration that hasn’t been resolved, said Sean Barrie, research analyst for Trepp.

In Michigan, the only CMBS debt issued for a property with a Toys “R” Us or Babies “R” Us are two notes for $29.9 million. Barrie said those two loans for Macomb Mall, a Lormax Stern property in Roseville, are current on their payments; the current balance is $29.74 million.

The Toys “R”Us bankruptcy filing on Sept. 18 was a ripple effect of a $7.5 billion 2005 leveraged buyout by Boston-based Bain Capital LP, New York City-based Kohlberg Kravis Roberts & Co. and New York City-based Vornado Realty Trust, among other factors. Its $400 million in annual debt payments prevented it from investing in its stores and improving its e-commerce operations, Business Insider reported.

The company is led by CEO Dave Brandon, who is also a former athletic director at the University of Michigan and former CEO of Ann Arbor-based Domino’s Pizza Inc.

 

Posted By: Crain’s Detroit Business on March 16,2018.  For more information, please click here to read the source article.

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