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Where have all the tenants gone? Views from the world of distressed retail

As you might imagine, companies that specialize in turning around distressed properties have lots of acquisition targets to choose from these days. It’s a great business to be in if you can get the timing right.

Over the past couple of years, for example, the once-moribund multifamily market has enjoyed a nice turnaround—even in hard-hit, boom-bust markets like Arizona. “Multifamily heated back up really quickly,” says Steven M. Jaffe, executive vice president and general counsel at Los Angeles-based B.H. Properties. “Due in large part to the availability of low-interest-rate debt, it happened much faster than in any other sector in commercial real estate.”

VacantWalmartJaffe and his colleagues have been snapping up distressed, multifamily assets in the Southwest and then turning them around by dropping the rents or renovating the buildings. It’s a strategy that depends a lot on strategic use of the company’s capital reserves.

“In places like Arizona, you had a lot of multifamily that owners had purchased between 2006 to 2008–the height of the market,” Jaffe explains.  “As the bottom fell out, a lot of those owners were compelled to stop reinvesting in their assets, which led to a self-fulfilling prophecy: The less money you put into the property, the worse it looks. The worse your complex looks, the lower your occupancy. Your occupancy drops and you end up with significant distress.”

Armed with investment capital, an opportunistic buyer can swoop in, snap up a class B- or C multifamily property, and start turning it around, Jaffe explains. “With these types of assets, you have a lot of month-to-month tenants,” he says. “That means you can effect the change a lot faster. You can drop your rents a little bit and see an immediate impact on vacancy.”

It’s a strategy that simply won’t work in second-tier retail, where buyers would have more acquisition targets if it weren’t for one thing—the lack of expanding tenants to fill vacant, or soon-to-be-vacant, boxes.
Jaffe CroppedBut wait, hasn’t the industry been buzzing about the revivified expansion plans of a host of retail chains? Aren’t tenants on the move again? Sure, and in fact BH Properties has been doing more deals with the likes of dd’s Discount Stores and Floor & Décor. For years now, however, retailers have been taking advantage of the overall economic malaise to “move up in the world” in real estate quality by jumping from, say, C to B- or B to A. “Let’s say you’ve got a 20,000-foot box in a secondary market,” Jaffe says. “The tenants that we would normally lease to have been enticed by better-located centers that never would have entertained the notion of a discounter before.” It’s no longer as easy, in other words, to buy a big-box tenant like Walmart and cut up this second-generation space for Big Lots, Harbor Freight, Goodwill and similar tenants.

Now, when Jaffe contemplates retail acquisitions, he looks at the box or boxes and tries to imagine which tenants would be willing to take the space. “We are trying to figure out what the answer is, because it is probably not going to be retail,” he says. “That’s the challenge facing a lot of the retail folks. If I could figure out an ideal use for an 80,000-sq.-ft. box, I’d be very wealthy.”

Even before the recession, landlords tried to fill such spaces with the likes of Steve & Barry’s, the discount t-shirt retailer that filed for bankruptcy in late 2008. Jaffe recalled walking through a newly opened Steve & Barry’s inside a former Walmart in Metro Atlanta. “It was 90,000 feet of cheap t-shirts and sneakers,” he says. “There was me, another guy and a cashier. I walked the whole floor and we were the only people in there …  As soon as Steve & Barry’s had to start paying rent on those stores, they started closing them. They just could not sell enough ten-dollar t-shirts to pay rent on a store that size.”

For Jaffe, the true barometer of retail health for the majority of the country is not whether cap rates are lower, or whether retail transactions are picking up. Even modest improvements in bellwethers like housing starts, employment or consumer confidence ought to be kept in perspective, he says. “We will know how the economy is doing when you start seeing some backfilling of what historically has been mom-and-pop type space,” he says. “That will signal confidence among those who operate those businesses, whether they are seeking to expand existing concepts or to open up new stores.”

Meanwhile, one of the biggest questions in retail is whether the age of the big-box store is truly over. “What we haven’t seen for the most part is a whole lot of new, bigger retail concepts—chains that can fill a 90,000-sq.-ft. box,” Jaffe says. “Given the impact of the Internet and the lessons of the past few years, those tenants may be gone for good.”


Los Angeles-based BH Properties seeks industrial, office, retail and multifamily opportunities in the Southwest and around the United States. When identifying retail properties, the company looks for big-box, strip malls and community centers of at least 40,000 square feet, ideally with a minimum 50 percent occupancy. Its retail portfolio, which encompasses about 1/4 of the company’s overall property inventory) now includes about 25 properties.

About Joel Groover

I started covering the shopping center industry in 1999 for Shopping Center World (later, Retail Traffic). Today, I'm the Atlanta-based contributing editor for Shopping Centers Today, the monthly magazine published by the International Council of Shopping Centers trade association. I earned my journalism degree from The University of Georgia and, among other publications, have worked for The Marietta Daily Journal, The Atlanta Journal-Constitution and Art & Antiques. I became a full-time freelancer in 2003. In addition to writing monthly cover stories and other features on retail real estate, I write and edit press releases, corporate newsletter articles, annual reports, byline pieces and website copy for a variety of PR and corporate clients. I live in Marietta, Ga., with my wonderful wife, Susan, and my 14-year-old identical twin boys, Andrew and Benjamin.


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