Retail woes spur mass vacancies

Jan Buchholz / Phoenix Business Journal

Just as the retail real estate market was showing signs of improvement, Borders Books & Music Stores is closing seven of its 11 Phoenix-area stores and Ultimate Electronics is shuttering all six of its local sites.

Add to that additional closings in the troubled Blockbuster movie rental chain, and a new wave of 350,000 square feet of retail space is flooding the Valley market.

Some of the additional space will equate to great opportunities for retailers, while other locations may require some creative thinking to fill, according to several local retail brokers.

“Not all retail space is created equal,” said Jeff Green, president and CEO of Phoenix retail consultancy Jeff Green Partners.

In most cases, landlords have the most to lose. Borders, Ultimate and Blockbuster all probably signed leases when the market was cranking along. Now, as the economy is stammering, rents have continued to drop.

“Will they get the same rents as before? Probably not,” Green said.

Mike Polachek, executive vice president of SRS Real Estate Partners in Phoenix, has the same take on the situation.

“The rents that Borders and Ultimate paid were rents that were negotiated when times were much better,” he said.

According to Colliers International in Phoenix, rents continue to drop quarter after quarter. In its fourth-quarter 2010 industry report, Colliers says current retail rates are down almost 20 percent from their prerecession peak.

That’s not to say every location will be hard to fill.

“The (Ultimate) location in Desert Ridge is terrific,” Polachek.

That space could be snatched up quickly, and at a premium lease rate. But it most likely is the exception.

For the most part, the Blockbuster sites will be the easiest to fill.

“Blockbuster has smaller sites with great visibility,” Green said.

Some of the Borders sites could go quickly, but others might be a challenge.

“The issue with Borders is whether it’s one story or two. There are very few two-story users,” Green said.

So even though both local two-story Borders sites are in premium locations — at Biltmore Fashion Park and the Scottsdale Waterfront — they might be tough to lease.

According to Bloomberg News, Barnes & Noble CEO William Lynch said his company could possibly take over some locations left vacant by Borders.

The Ultimate Electronics big boxes will be even tougher to fill. Both Green and Polachek said those sites may have to be divided into smaller spaces, depending on the configuration of the box.

Another possibility, Polachek said, is converting them to new uses, such as health care facilities, call centers and schools.

“We’ve had churches look at some boxes,” he said.

Recently, David Wetta and his team of brokers at Faris Lee Investments in Scottsdale received an assignment to market four locations in Phoenix, Mesa, Chandler and Tucson that previously housed Mervyns department stores.

While the Borders and Ultimate Electronics announcements translate into more competition, Wetta believes the Mervyns sites lend themselves to greater flexibility. They have multiple entrances, which allows for easier subdivision.

“We’re already getting a lot of phone calls and some offers,” Wetta said.

He also notes that available Mervyns sites are adjacent to well-run, high-occupancy properties. The Chandler site at 2992 N. Alma School Road, for instance, is next to a shopping center owned and operated by Michael Pollack. The founder and CEO of Pollack Real Estate Investments is a longtime developer and redeveloper of retail centers, and one of the Valley’s largest property owners.

Although 2009 was Pollack’s worst year in business, 2010 proved to be one of the best. His company signed 900,000 square feet of new and renewed leases last year.

Pollack said his commitment to renovate all of his centers, beginning in 2007 and continuing through the Great Recession, was pivotal to the current success.

“Plus, we adjusted quickly to the market rates and had a very aggressive tenant re-signing program,” he said.

As for the departures of Borders and Ultimate Electronics, Pollack said it’s nothing to worry about.

“Arizona right now is the land of opportunity. I don’t know how it gets any better than this,” he said.