PRINT THIS STORY:

CHANGE TEXT SIZE:

FILLING SERVICE MERCHANDISE’S VOID

By Glen A. Beres

The outside is pretty, but rejiggering the inside for a new tenant can be tricky.

The demise of Service Merchandise leaves a huge hole in the nation’s shopping centers that other retailers will be only too pleased to fill, experts say. But fitting into those spaces will not always be easy, some caution.

The Brentwood, Tenn.-based retailer’s recent decision to go out of business after more than 40 years should create opportunities for specialty retailers to pick up real estate and gain additional market share.

Many retail and real estate experts feel that there is likely to be some intense interest among retailers in obtaining the most desirable of Service’s locations, which include its headquarters and some 70 buildings it owns, and an additional 150 unexpired leases it holds.

With the fate of those 220 locations still up in the air, Service will undoubtedly try to sell as many of its owned stores as possible — and to find new tenants for the stores it leases — to recoup some additional cash to pay off creditors.

“There are a number of highly desirable Service sites that should be easily disposed of,” said Kurt Barnard, president of Barnard’s Retail Trend Report, Upper Montclair, N.J. Barnard added that “everyone will be fighting for those prime sites” in a scenario similar to what played out when other large retailers (Bradlees, Caldor, Montgomery Ward) closed their doors.

The long-struggling retailer, which had been operating under Chapter 11 bankruptcy protection since March 1999, received court approval in January to conduct going-out-of-business sales at all of its more than 200 locations. Those sales — in which Service will seek to unload some $1 billion in merchandise, are being conducted by a consortium of liquidators led by Gordon Brothers Group, Boston; The Ozer Group, Needham, Mass; and SB Capital Group, Great Neck, N.Y.

Most of Service’s remaining stores are considered “valuable property” because the company had already closed some 150 units over the past few years and presumably kept the best ones in its real estate portfolio, said Eric Snyder, senior vice president and director of corporate leasing for CBL & Associates Properties, a Chattanooga, Tenn.-based REIT that has four Service stores as tenants.

“We look at every one of those sites as an opportunity,” he said. “We think this will work out well for developers and REITs, and we don’t anticipate having much trouble filling those spaces.”

However, some experts point out that the size and layout of the Service stores could make it difficult to refill them with new retailers. Norman Kranzdorf, chairman of Kramont Realty Trust, a Plymouth Meeting, Pa., firm that has dealt with Service in the past, noted that the stores have an “unusual configuration” because they were built to accommodate a catalog showroom format that is no longer viable.

“It will take a special kind of retailer to fill those spaces,” Kranzdorf said. “But I’m sure they’ll figure out what to do.”

Others aren’t so optimistic. According to Kenneth Gassman Jr., senior vice president and retail analyst at Richmond, Va.-based Davenport & Co., Service stores — which include freestanding formats as well as those anchoring strip centers and regional malls — are typically 50,000 to 60,000 square feet. This makes them too large for most jewelry stores (50 percent of Service’s annual sales came from jewelry) and too small for big-box retailers such as Kmart, Target, Wal-Mart or most supermarkets and department stores.

“When you look at Best Products [a competing catalog showroom chain of some 169 locations that liquidated in late 1996], not a single one of those stores became a retail location for someone else,” Gassman said. “I think Service is going to be hard-pressed to get rid of more than a handful of these stores.”

Gassman also noted that in recent years, Service had streamlined its product offerings, cut many of its stores in half, built a separate entrance for the new unused space and subleased that space (25,000 square feet) to specialty retailers such as A.C. Moore; Bed Bath & Beyond; H.H. Gregg; Michaels; Office Depot; and T.J. Maxx. Many retailers don’t want to bother with stores that have been “torn up” like those Service stores that were split and subleased, Gassman said, because they would have to go in and practically rebuild them from the ground up.

CBL’s Snyder, however, argues that the smaller Service stores are ideal for specialty retailers such as those that were already subleasing space from the chain, as well as such companies as Barnes & Noble, Hobby Lobby, Office Max, Old Navy, Staples and larger restaurants, among others.

Adding to Service’s difficulties in unloading its properties is the fact that the market is reeling from another major hit as a result of Kmart Corp.’s Chapter 11 bankruptcy filing. Kmart announced March 8 that it was shuttering 284 stores.

“There’s no question that the [commercial real estate] market has softened in general during the last few years, and Service’s situation may have been made worse by the Kmart bankruptcy at the same time,” said Randal S. Mashburn, a partner at Nashville, Tenn.-based law firm Baker Donelson Bearman & Caldwell, which represents several landlords with Service locations.

Another potential problem related to both Service’s older locations and their reduced-size stores is that the company may have to come up with the money to make leasehold improvements before it can sell those leases to other retailers.

“Service didn’t have much trouble filling up those ‘half locations’ before, but they may have trouble now, especially in this economy,” said Sam J. McAllester III, a partner at Nashville-based firm Wyatt, Tarrant & Combs. The firm is lead counsel for a number of landlords leasing retail space to Service, including Weingarten Realty Investors, a Houston-based REIT that has Service as a tenant in about six of its properties.

Although many landlords seem worried about not being able to fill those Service locations, the exposure seems to be spread evenly among dozens of different landlords holding only a handful of leases each, according to Mashburn. His firm represents some 30 landlords involved with at least 50 Service properties — including such REITs as Federal Realty Investment Trust, Rockville, Md.; General Growth Properties, Chicago; and New Plan Excel Realty Trust, New York City. Mashburn said that though these clients’ situations vary “dramatically” in relation to their Service locations, most count only one or two of the defunct retailer’s stores as tenants; a few have as many as six. Locations vary from strip center to stand-alone to mall anchors. Some stores are newer and some are older. For some of Mashburn’s clients, the rental rate on their Service locations is below market value, while on others, it’s above.

“Some people will be happy to get the [Service] property back quickly, because it has a lot of value, and they can turn around and lease it to another retail tenant,” Mashburn said. “But some have older, stand-alone properties that need restructuring, and they are concerned about what will happen with them.”

 

© 2008 ICSC. All rights reserved. | Terms and Conditions | Privacy Policy | Contact ICSC | ICSC Home |