OUTDATED STORES POSE REAL ESTATE QUESTIONS

RUSSELL REDMAN

With bigger formats in vogue for store-base upgrades and expansions, supermarket chains are encountering both difficulty and opportunity as they seek to shed obsolete smaller units, real estate executives told SN.

"Most aggressive supermarket chains have a plan for the next five or 10 years to expand their small stores into larger, newer formats and keep up with the larger prototypes many of their competitors are going to," said Howard Makler, chief operating officer of Excess Space Disposition, a Huntington Beach, Calif.-based real estate firm specializing in filling surplus retail space.

"So many operators will have a significant number of smaller stores to close over the next five to 10 years. We foresee an ongoing supply of these boxes," noted Makler, whose clients include Winn-Dixie, Kroger, American Stores, Farm Fresh and Giant Food Stores. "The good news is that there are users looking for them. The bad news is that they tend to be more creative users rather than normal retail-type users, which means the task is far more difficult."

Supermarket chains evolving into larger store concepts frequently are able to enlarge existing units in place or totally rebuild with the new prototype in the same shopping center, real estate executives said. But just as often, they noted, retail and parking space constraints in the center prohibit a bigger store -- meaning a new site must be found for the new unit and the old space must be sold or leased.

"The first preference would be to convert the smaller store by enlarging it," said Harvey Gutman, senior vice president of retail development at Pathmark Stores, Woodbridge, N.J. "But often that's not possible because of site limitations."

According to Brian Pall, vice president of real estate development at A&P, Montvale, N.J., "As you do replacement stores, sometimes you knock down the old store to build a new one, and sometimes you make a deal with the landlord to put in a retailer that is going to enhance the shopping center from your old space. When you replace existing stores, surplus property is a factor considered in the transaction."

Grocery chains generally opt to sell off former store spaces rather than carry their lease obligations, according to Makler.

"Retailers typically do not want to be landlords. They'd much prefer to sell or, in the case of a lease, terminate the lease rather than sublease. They'd prefer to sell and have their cash back to use for other things," he said. "They will typically sell it with a deed restriction. Unless a supermarket has completely pulled out of a market, it will almost always insist on a food restriction and usually a pharmacy restriction."

Gutman said renting vacated store space represents a welcome opportunity for supermarket companies to generate some extra income. "Good supermarket operators with stores that have been closed and replaced with larger stores are typically in good, long shopping centers with low rents. So it's an opportunity to sublet and make some money."

Executives agreed there's certainly no lack of retailers that would take old supermarket space. With stores in the 20,000- to 40,000-square-foot range, category killers have been a prime consumer of ex-supermarket sites, they said.

"There are always new retailers for space sizes that are no longer our favorite choice," said the real estate director for a major Western-based supermarket operator. "Retailers like OfficeMax, Staples, PetsMart and other box users, which didn't even exist 15 years ago, will come in and fill those types of spaces."

According to Drew Alexander, president of Weingarten Realty Management Co., a Houston-based real estate investment trust, "Most of the discount, off-price apparel industry got started in old supermarket sites. Chains like Marshalls, T.J. Maxx, Stein Mart and a lot of the other power center-type tenants started that way. It all comes down to the quality of the location. There have been times where a supermarket closed and we had problems [filling the space] and other times where we leased it for more money."

Due to attractive rents, major grocery chains' dark space has helped fuel growth for independent supermarket operators with 20,000- to 35,000-square-foot formats, said Gerald Divaris, president of Divaris Real Estate and of the national brokerage network Realty Resources, both based in Virginia Beach, Va. Food retailers specializing in ethnic groceries, seafood, produce or other categories also often find old supermarkets strong locations, said Gary Linder, president of The Linder Co., an Indianapolis-based real estate firm.

Makler cited hardware stores, furniture retailers, flea markets and apparel stores as well as churches, schools and storage facilities as examples of tenants he's found to fill former supermarket space. "The location will determine, in large part, whether it's recycled as another retail use, a quasi-retail use or a non-retail use," he said.

Yet disposing of excess space is no easy task, real estate executives noted. Despite a plethora of retailers willing to take the space, considerable time and effort is required to actively seek out potential tenants and match them to the right sites, they said.

"It's certainly a challenge. Having good locations is critical, and having a professional, focused team working on it is critical," Alexander said. "It's not something you can do in your spare time." Many supermarket chains outsource leasing agents to help fill vacant space, executives said.

If a single tenant can't be found to take an ex-supermarket slot, one option is to carve up the site to lease or sublease to several tenants. But that can be complicated and costly, executives told SN. "Converting a grocery store to other uses can be an expensive proposition," Linder said. "It depends on the configuration, the cost involved and the rate that you can achieve [in deciding] whether it makes sense."

According to Divaris, "It's not so easy to do because of the depth of the supermarket. You can only divide it up so much, otherwise you get long, sausage-style stores. The stores can't really be divided into much less than 5,000 square feet."

Often, a potential tenant may take enough square footage that it makes sense to rent that tenant the whole space, Makler said. But if the decision is to convert the site to fit several tenants, the cost should be rationalized with space commitments, he noted.

"You really have to have a commitment by at least 70% of the space to be used before you can justify paying for a subdivision," he said. "Supermarket operators are typically very reluctant to invest their hard cash into any kind of remodel on a closed facility because, in theory, those dollars are taken away from opening up a new store." A subtenant could be asked to help pay for conversion of the building in exchange for a free rent credit for the amount of the subdivision cost, he added.