Jones Lang LaSalle
Glut of retail assets could slow auctions
Fri Apr 28, 2006 9:49 AM IST
By Jessica Hall
PHILADELPHIA (Reuters) - A glut of retail assets on the auction block could make it harder for companies to make a quick sale.
Complicating the process are changing consumer tastes that could force the new owners to spend more time and money than they originally expected to retrofit the real estate into new formats, analysts said.
After buying May Department Stores last year, Federated Department Stores Inc. also plans to sell 80 redundant locations, as well as the Lord & Taylor chain and its bridal unit, which includes discounter David's Bridal, After Hours Formalwear and Priscilla of Boston.
Other retailers on the block include Michaels Stores Inc., an arts and crafts chain, and Jones Apparel Group Inc., owner of the Nine West label and Barneys department stores. Saks Inc. wants to unload its Parisian department store chain, and 27 former Wal-Mart and Sam's Club leased locations are up for sale.
Private equity firms and developers have been snapping up retailers in recent years, attracted by the real estate value and the prospect of turning around underperforming companies and selling them at a premium. Last year, buyout shops agreed to acquire Neiman Marcus, Toys R Us and Linens 'N Things.
Given the retail assets that have already changed hands and the amount of space still on the block, the current auctions could become more complicated and lengthy.
The department stores Federated is shedding could fetch between $650 million to $1.2 billion, analysts said. They said the wide range in value reflects the varied demographics of each location and the potential that the stores could require large investments to renovate or revamp.
"Investors should keep in mind that this (auction) process will take longer than most initially expected and will by its vary nature be lumpy," said FTN Midwest Securities Corp. analyst Jeff Stinson.
Some of those department stores could fade away, with buyers carving the space into parcels for smaller retailers or creating office and residential properties, analysts said.
The Federated assets "have attracted a lot of interest from real estate developers, perhaps the biggest surprise to date," KeyBanc Capital Markets analyst Jeffrey Stein said earlier this month after meeting with Federated management.
Converting a department store into smaller units could be more lucrative in the long run, analysts said. While department stores pay annual rent of about $3 to $10 a square foot, specialty retailers usually pay $12 to $18.
Keeping department stores on life-support may not make sense at a time when malls have suffered from declining foot traffic as consumers' tastes have shifted to so-called lifestyle center that have strip-mall type formats with direct access to stores and restaurants.
"For the properties that are really bad, you don't want to keep banging your head against the same wall," said Eric Bowles, director of global research for CoreNet Global, an Atlanta-based corporate real estate trade group. "You want to do something very different."
As department store chains continue to consolidate, developers need to explore other options, experts said.
"In five to 10 years, if we only have five chains left, you're going have to do something else with that space," said Greg Maloney, president of the retail business at real estate firm Jones Lang LaSalle Inc. "When you get a department store back -- it's a great opportunity for us. It's not a death sentence."
Federated, however, wants to sell its Lord & Taylor chain as an ongoing business, rather than piecemeal to developers, sources familiar with the situation have said.
Yet a buyer wanting to keep the chain intact would need to differentiate Lord & Taylor from rival department stores by returning it to its heritage as a high-end retailer, adding exclusive brands and boutique "store within store" areas, some analysts said.
"With such uncertainty about the future direction of the (Lord & Taylor) business, it is difficult to assess what a financial buyer would be willing to pay for the business." FTN's Stinson said.
With annual sales of about $1.6 billion and a Manhattan flagship store, Lord & Taylor could fetch roughly $850 million to $1 billion in an auction, retail investment bankers said.
Although investment bankers and analysts see private equity firms as the most likely buyer, Jones Lang LaSalle's Maloney cautioned that the purchase of a mall anchor store brings several complications, including potential construction restrictions.
"When you come in as a private equity buyer and think you could put in with any type of store you want, you could get a fight from the landlord or other tenants," he said.
Because of various restrictions, Maloney said, a private equity firm would "have to be prepared to hold the asset for a longer period of time than they may be expecting."
Glut of retail assets could slow auctions
Fri Apr 28, 2006 9:49 AM IST
By Jessica Hall
PHILADELPHIA (Reuters) - A glut of retail assets on the auction block could make it harder for companies to make a quick sale.
Complicating the process are changing consumer tastes that could force the new owners to spend more time and money than they originally expected to retrofit the real estate into new formats, analysts said.
After buying May Department Stores last year, Federated Department Stores Inc. also plans to sell 80 redundant locations, as well as the Lord & Taylor chain and its bridal unit, which includes discounter David's Bridal, After Hours Formalwear and Priscilla of Boston.
Other retailers on the block include Michaels Stores Inc., an arts and crafts chain, and Jones Apparel Group Inc., owner of the Nine West label and Barneys department stores. Saks Inc. wants to unload its Parisian department store chain, and 27 former Wal-Mart and Sam's Club leased locations are up for sale.
Private equity firms and developers have been snapping up retailers in recent years, attracted by the real estate value and the prospect of turning around underperforming companies and selling them at a premium. Last year, buyout shops agreed to acquire Neiman Marcus, Toys R Us and Linens 'N Things.
Given the retail assets that have already changed hands and the amount of space still on the block, the current auctions could become more complicated and lengthy.
The department stores Federated is shedding could fetch between $650 million to $1.2 billion, analysts said. They said the wide range in value reflects the varied demographics of each location and the potential that the stores could require large investments to renovate or revamp.
"Investors should keep in mind that this (auction) process will take longer than most initially expected and will by its vary nature be lumpy," said FTN Midwest Securities Corp. analyst Jeff Stinson.
Some of those department stores could fade away, with buyers carving the space into parcels for smaller retailers or creating office and residential properties, analysts said.
The Federated assets "have attracted a lot of interest from real estate developers, perhaps the biggest surprise to date," KeyBanc Capital Markets analyst Jeffrey Stein said earlier this month after meeting with Federated management.
Converting a department store into smaller units could be more lucrative in the long run, analysts said. While department stores pay annual rent of about $3 to $10 a square foot, specialty retailers usually pay $12 to $18.
Keeping department stores on life-support may not make sense at a time when malls have suffered from declining foot traffic as consumers' tastes have shifted to so-called lifestyle center that have strip-mall type formats with direct access to stores and restaurants.
"For the properties that are really bad, you don't want to keep banging your head against the same wall," said Eric Bowles, director of global research for CoreNet Global, an Atlanta-based corporate real estate trade group. "You want to do something very different."
As department store chains continue to consolidate, developers need to explore other options, experts said.
"In five to 10 years, if we only have five chains left, you're going have to do something else with that space," said Greg Maloney, president of the retail business at real estate firm Jones Lang LaSalle Inc. "When you get a department store back -- it's a great opportunity for us. It's not a death sentence."
Federated, however, wants to sell its Lord & Taylor chain as an ongoing business, rather than piecemeal to developers, sources familiar with the situation have said.
Yet a buyer wanting to keep the chain intact would need to differentiate Lord & Taylor from rival department stores by returning it to its heritage as a high-end retailer, adding exclusive brands and boutique "store within store" areas, some analysts said.
"With such uncertainty about the future direction of the (Lord & Taylor) business, it is difficult to assess what a financial buyer would be willing to pay for the business." FTN's Stinson said.
With annual sales of about $1.6 billion and a Manhattan flagship store, Lord & Taylor could fetch roughly $850 million to $1 billion in an auction, retail investment bankers said.
Although investment bankers and analysts see private equity firms as the most likely buyer, Jones Lang LaSalle's Maloney cautioned that the purchase of a mall anchor store brings several complications, including potential construction restrictions.
"When you come in as a private equity buyer and think you could put in with any type of store you want, you could get a fight from the landlord or other tenants," he said.
Because of various restrictions, Maloney said, a private equity firm would "have to be prepared to hold the asset for a longer period of time than they may be expecting."
posted by Jones Lang LaSalle NJ News Blog at 9:44 AM
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