What happens when you lose an Anchor Tenant?

This article was reprinted from the Globe and Mail this morning. If you are, or are considering investing in commercial property, this article provides a unique perspective…

When Blockbuster Canada announced last week that it would close its remaining stores across the country, landlords were put on notice that millions of square feet of retail space would flood into the market.

More than 250 stores will close by the end of the year – nearly 150 had closed previously when the company went into receivership in May – and in total, the chain will vacate two million square feet of space.

Finding a tenant for at least one Blockbuster location, in Port Alberni, B.C., has posed challenges, said Doug LePatourel, a broker and vice-president at Colliers International’s Vancouver division.

“I’m optimistic, but we have done some marketing for the last few months and it is vacant,” said Mr. LePatourel. “We’ve been talking about putting some temporary shop in there, like a dollar store at a much reduced rent. There is also a possibility of splitting the space.”

The unusual size of Blockbuster stores could create problems in softer markets, said Drew Keddy, vice-president, Canada, at Colliers.

“Being 5,000 to 6,000 square feet, that’s a big space for smaller markets. And you can’t fit a Shoppers Drug Mart or London Drugs in one of those stores, because they want 15,000 to 20,000 square feet,” he said. “It’s going to cost some money to re-lease it, whether that’s capital investment to optimize the space or just reduced rent to entice somebody to come and take it.”

The influx of empty Blockbuster properties won’t negatively affect the Canadian retail real estate market, said Steven Alikakos, senior vice-president of retail for DTZ Barnicke Canada. “We have a shortage of retail space. We need the space,” he said.

The fact that many Blockbuster properties are on a standalone “pad” site, away from the main shopping centre or strip mall, will make them desirable.

“There’s a pent-up demand for the standalone pad sites like you see in the suburbs,” he said. “Six thousand [square feet] is a little bigger than what most chain restaurants are looking for, but what it does do is it allows you to slice them down the middle and divide them into two spaces, and then you’ve got two beautifully-sized, 3,000-square-foot pieces, which are very easy to lease.”

Mr. Alikakos says the space also could serve banks looking to expand. “You may have a bank that always wanted to get into the area because of the demographics, and this is a great opportunity,” he said.

Smaller landlords, however, may have more to lose from the Blockbuster closings, he said.

“It’s the smaller landlords – the one-offs – who own a plaza and were lucky enough to get this triple-A covenant of Blockbuster, which gave them some oomph in their portfolio,” he said. “That may be replaced now with the same rent, but not as strong a covenant.”

John Crombie, senior managing director at Cushman & Wakefield in Toronto, also suggests fitness centres, yoga studios and breakfast restaurants as other replacement candidates.

Mr. Crombie points out that although two million square feet of retail space may sound substantial, it is a drop in the bucket – at of the end of last year, the inventory of retail space in the Greater Toronto Area alone was 223 million square feet.

More than 100 of the shuttered Blockbusters are in the GTA, and Mr. Crombie says the market could use the space.

“From 2008 to 2009, there was very little inventory added to the Toronto market,” he said. “In 2009, there was 12 million square feet added, which was a good amount of space. But we could use more, because we have just so much more demand.”

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Garamark Property Management is located in Winnipeg, Manitoba and successfully balances protecting the investment of an owner while retaining happy tenants.