Landmark Links March 23rd – No Easy Way Out


Lead Story…. It’s no secret that the last few years have been brutal ones for retail landlords and tenants.  The American economy is still driven by consumer spending but overbuilding, loss of share to e-commerce and ill-conceived leveraged buyouts that saddled retailers with debt have brought the industry to it’s knees.  Worst of all, this is happening in the midst of a prolonged economic boom so it’s not as if retailers and property owners can see a light at the end of the tunnel as they could if we were in a recession and the macro picture was poised to turn upward.  If anything, prospects will deteriorate further when the economy inevitably enters a recession, whenever that may be.  Just when things couldn’t get any bleaker, the sector is experiencing it’s own “hold my beer” moment (at least until Sears meets its long-anticipated end) as iconic Toys ‘R’ Us announced that it is going out of business and shuttering it’s more than 700 US stores.  Natalie Wong, Matthew Boyle and Claire Boston of Bloomberg took a look at what is going to happen with all of those empty stores (emphasis mine):

The collapse of Toys “R” Us Inc. is yet another blow for landlords, who now will have gaping holes of suburban retail space up for grabs. And few tenants would want them.

The debt-laden toy chain, with more than 700 stores across the U.S., became one of the largest victims of the retail decline when it announced on Thursday that it would go out of business after a failed rescue effort. The liquidation could dump millions of square feet of real estate onto a market that’s already bloated with vacancies from retailer bankruptcies and store closures, a trend that’s been escalating as shoppers increasingly turn to the internet.

“It’s really tough right now to find a solution for something that’s that big and with that many locations,” Jan Kniffen, a retail consultant and founder of J. Rogers Kniffen Worldwide Enterprises, said in an interview. “How many people need more stores right now? How many people need more square footage? Not very many.”

Toys “R” Us has stores in all types of shopping properties — from standalone locations to community strip centers to large regional malls. Many centers are in the hands of publicly traded real estate investment trusts that lease space to the chain and may struggle with declining values for the properties. Some stores are owned by Toys “R” Us itself.

There is nothing close to a one-size-fits-all solution here.  Some of the 700+ locations are viable and will find replacement tenants/buyers but many others will not.  Those in tight – typically affluent – markets where the very few remaining big-box retailers looking for more space want to be will find themselves occupied in relatively short order.  The stores that Toys ‘R’ Us owns directly will be sold and the remaining stores will sit vacant for a protracted period of time unless the (typically large) landlords who own them decide to be proactive.  The stark reality facing retail landlords is that the prospective tenants have all of the negotiating power and there is still far too much space built out in the US.  The eventual solution will be re-development of many of these sites, especially when one considers that the odds that Toys ‘R’ Us will be the last major retailer to fail or shutter stores in the coming years is slim to none.  However, only time will tell if the coming flood of available but un-wanted retail spaces from the closure of Toys ‘R’ Us locations will be the catalyst to force wholesale redevelopment of ghost town retail centers or if more pain will be required before landlords throw in the proverbial towel.  If landlords dig in their heels to wait for the market to return, there may very well be a light at the end of the tunnel but it will be that of an oncoming locomotive.


Smoke Signals: Stronger global growth, a weaker dollar, tax reform and rebounding business investment could make the economy overheat and appear to have the Fed signaling more than 3 rate hikes this yearBut See: The Federal Reserve raised rates 25 basis points earlier this week but still plans on only 2 more rate increases for 2018. for now.

Hard At Work: Weekly initial unemployment claims increased last week but are still low by historical standards.

High Concentration: A whopping 80% of all venture capital investment goes to just three states.


Warning Signs: Green Street’s Mike Kirby says that REITs’ current discount to net asset value (NAV) is typically a reliable indicator of negative repricing of private market real estate. (h/t Steve Sims)

Piling In: Large investors like pension funds are allocating ever-larger sums into illiquid assets such as real estate in order to boost returns.  However, many are using bad assumptions in unsophisticated models and are ill-prepared for the risks that come with illiquidity.


Winds of Change: Demographic changes continue to point towards coming tailwinds for for-sale housing and headwinds for rentals.

Spillover Effect: California’s housing problems are spilling across it’s borders as a population boom leads to soaring home prices and rents as well as a growing homeless crisis in Reno.  See Also: Lower income and middle class Californians fed up with housing costs and high taxes are fleeing the state in large numbers as domestic migration continues to ramp up.


Land Mines: The legalization of marijuana in California along with the strict laws governing it’s use is going to lead to a harsh reckoning for outlaw marijuana producers who can’t or won’t comply with licensing requirements.

Insufferable: Reading this story about a bunch of 20-something entrepreneurs building a utopian club for Millennial elites in Utah makes me hope that everyone featured in it gets tossed into a lit volcano.

Long Shot: Don’t feel bad if your bracket is busted because you didn’t pick UMBC (which was previously best known for it’s chess team) to beat UVA in the first round of the NCAA Tournament.  After all, the odds are pretty long.  By way of example, the odds of hitting the Mega Millions lottery jackpot are 1 in 302.6 million and the odds of winning the Powerball jackpot are 1 in 292 million.  The odds of filling out a perfect bracket?  1 in 128 BILLION.

Charts of the Day 

Updates on for-sale and rental housing production from The Daily Shot

The residential construction report was disappointing.

• Housing starts:


• Building permits:


• The inventory of multifamily housing that is coming to market remains near multi-decade highs. This trend has to weigh on new apartment construction investment and credit.


• This chart shows single-family vs. multifamily building permits over time.

• Separately, shelter costs (rentals and homeownership) have been outpacing wages since the 1970s.


Don’t Try This at Home: Tide Pods are so last month.  Teens are now eating raw slugs on a dare which is leading to brain damage because, Millennials.

Ultimate Filibuster: Members of the Kosovo opposition party set off tear gas in parliament in order to stop a vote.

No You’re Not: A Romanian court has ruled that a 63-year-old man is dead despite what would appear to be convincing evidence to the contrary: the man himself appearing alive and well in court after he failed to contest a 2003 death certificate within the statute of limitations.

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