Toys ‘R’ Us Closures May Hit Retail Sector Hard

March 20, 2018

Toys ‘R’ Us recently announced its plan to close or sell more than 800 of its stores across the country, and some commercial real estate experts are concerned about the hundreds of empty storefronts that will be left behind. Some landlords are already scrambling to find replacements.

Many Toys R’ Us and Babies R’ Us locations are between 40,000 to 65,000 square feet. This is “problematic as the list of retailers seeking that [floor plan] is short,” analysts from Green Street Advisors wrote in a recent note to clients. “More bankruptcies are putting further pressure on big box market rents.”

Other notable big-box retailers, like Sports Authority, Circuit City, and RadioShack, have already left vacant storefronts. Landlords are also struggling to fill the vacancies from the closure of Sears Holdings stores across the country. Strip malls anchored by big-box stores could struggle further amid Toys R’ Us’ latest exit, CNBC reports.

Some REITs told CNBC that they intend to redevelop Toys R’ Us locations to fit several smaller companies once the liquidation is complete. Still, the turnaround from losing a large big-box tenant and then gaining a new tenant to occupy the space is typically 1.5 to 2 years, according to RBC Capital Markets analyst West Golladay.

That said, some landlords aren’t viewing the closures as a reason to decrease rents to lure new tenants. In fact, they view the closures as an opportunity to try to land new tenants that may pay more per square foot.

“An important distinction between Toys and other recent bankruptcies is that many of Toys’ leases [today] are well below market—a silver lining for landlords,” analysts from Green Street Advisors wrote. As such, landlords may be hoping to secure new tenants who will pay higher rents per square foot.

Toys ‘R’ Us is still hoping to save 200 of its stores. The toy giant has not yet disclosed a timeline on other liquidation sales.

Source: “Toys R Us Closures Will Leave Hundreds of Vacant Stores on the Market With Few Obvious Replacements,” CNBC (March 16, 2018)