Analysts eye local Kmart real estate

Jennifer Robison

Wednesday, Jan. 30, 2002 | 11:02 a.m.

Las Vegas retail analysts say any local store closures by bankrupt retailer Kmart Corp. would add to a growing glut of "big-box" retail space in the Valley.

The failure of several other retailers over the last year -- including Montgomery Ward, HomePlace and House2Home -- has left hundreds of thousands of square feet of big store locations vacant locally.

Montgomery Ward's failure in December 2000 dumped more than 200,000 square feet of retail space on the market in early 2001, according to brokerage firm Colliers International. About 130,000 square feet of that space will house a Lowe's Home Improvement Center, which is being built at Ward's former East Charleston Boulevard store; after nearly a year on the market, the retailer's Decatur Boulevard store remains empty.

HomePlace's bankruptcy and its subsequent closure of two local stores last summer placed more than 80,000 square feet of big-box retail space on the local market, the Colliers data said. Neither site has been absorbed.

And the recently shuttered House2Home's real estate -- a total of 210,000 square feet in two locations -- will officially hit the market next month, with no potential takers in sight.

Kit Graski, a senior vice president with CB Richard Ellis, said his data show a total retail inventory of 35 million square feet in the Valley.

He said when the vacancies involving Montgomery Ward, HomePlace and House2Home appear for the first time in his 2001 retail report, the market "is going to have a 1.5 (percentage point) jump just based on those stores. We're at 4.5 percent vacancy right now, but those vacancies will jump us up to 6 percent."

Though Kmart hasn't revealed official plans for disposing of any of its 2,100 stores nationwide, analysts have said a policy on store closures could emerge after the company's corporate review in April.

Hundreds of Kmart stores nationwide could be involved.

Colliers International statistics show the chain's nine local stores with a total of 931,000 square feet of space.

"Kmart does have some good real estate locally," Graski said. "But I would say half its stores would have problems (being absorbed).

"It would take a long time to absorb those stores, because Kmart is generally a 100,000-square-foot-plus tenant. You're looking at very few tenants that can actually take on that space without trying to chop the space up and retrofit it."

Dividing a big retail box into smaller stores is an option landlords have when trying to fill vacated space. But it's not a popular option, Graski said.

"Cutting up space is a problem, because it takes a lot of money to (divide stores). A lot of times, big-box space is deep -- maybe 200 feet deep. If you cut that space in two, you've got narrow, deep space, and no one wants that kind of layout."

Matt Bear, a principal of NewMarket Advisors, a commercial real estate brokerage, said such alterations might be the only choice a landlord has.

"Yes, you'd like to have one tenant," Bear said. "But in the end, it may be more profitable to get two in. It's unlikely you're going to have one user take those spaces. It's more likely you'll have to get a few users in and be creative."

Prospective tenants for abandoned big-box space are far and few between for two reasons.

First is the relatively small universe of big national retailers that Graski cited.

Second, the competition that has forced retailers like HomePlace, House2Home and Montgomery Ward out of business has ensured their competitors were already leasing space near the companies' closed stores.

"Where HomePlace was at Stephanie and Sunset is excellent real estate, but almost every tenant in every category is down there," Bear said. "So who can go down there?

"It's just going to take time, money and creativity to fill those spaces."

The same would be true should Kmart close local locations.

Kmart's primary competitors -- Wal-Mart and Target -- already have stores near many of Kmart's Valley locations, and would thus be unlikely to assume vacant Kmart stores.

For example, the Super-Kmart at 10405 S. Eastern Ave. serves the same demographic area as the Wal-Mart and Target stores about a mile north on Eastern, eliminating as prospective tenants the two retailers best-suited to taking over the 143,000-square-foot store.

The limited nature of big-box retail has its positive effects, both Graski and Bear said. It inoculates the Valley's overall retail market from the more serious symptoms of a vacancy rate that rises 1.5 percentage points in a year.

"These are very specific buildings, and I don't think a lot of people are making decisions yet based on being able to go over to a cheaper, closed store," Graski said. "There's not enough opportunity in the market yet for tenants -- there's still a fairly finite number of deals. It would take the stores of Kmart and (another major retailer) coming on the market to force overall lease rates down significantly."

Also, the fortunes of big-box retailers and the stores they occupy has virtually no impact on the grocery- and drugstore-anchored neighborhood shopping centers that comprise a huge part of the Valley's retail market.

"Empty Kmart stores wouldn't stop the grocery stores from doing business," Graski said.

Empty Kmart stores might slow business down for neighboring retailers, Bear said, which might in turn suppress lease rates at Kmart-anchored shopping centers.

"If the anchor (tenant) is gone, the center doesn't draw as many people," Bear said.

Though individual power centers may suffer in the short-term, the market's continuing population explosion would mitigate whatever problems a total failure of Kmart might present, Graski said.

"Is the market doing bad? I would have to say no," Graski said. "Other than these boxes, I feel the market is very healthy.

"We might fare better than other markets because we are a hot economy, and when companies are looking to shine, an easy way is to go to a hot market. As older retailers leave, new companies can get started. It creates a real estate opportunity and the opportunity for a new company to get into a marketplace."

Despite the near-term uncertainty failed big-box retailers have caused in the market, the shakeout will pave the way for a stronger market in the long term, Bear said.

"What makes retail such an interesting segment of real estate is its ability to be a chameleon and change according to people's needs," Bear said. "The cycle is to get better. The stores of today are better than the stores of 20 years ago."