FEATURE: Code Bluelight

Supermarkets in the same shopping center with a Kmart that is closing are going to take a big hit. Just ask Joe Azzolina. He knows first-hand what can happen to a business when the lead anchor in a shopping center pulls up stakes.

Two of Azzolina's Foodtown stores in central New Jersey were co-anchors in strip centers with Bradlees, Stop & Shop's former discount department store division. Bradlees filed for bankruptcy right after Christmas in 2000 and liquidated its stores in early 2001. The stores are still dark, and Azzolina was forced to shutter one of his supermarkets as a result. "We originally had to close our Woodbridge store because of a flood, but we reopened it and started to build back the business," says Azzolina, president of Food Circus Super Markets in Middletown, N.J. "Then Bradlees closed. The business was coming back, and then it just dropped off. We had to close permanently."

Food Circus' Hazlet supermarket has fared a little better because it has better exposure than the one in Woodbridge, which was partially obscured by elevated railroad tracks, but business is still down. "In Hazlet we are the corner store on the highway, but [Bradlees' closing] has still affected our volume quite a bit," Azzolina says, noting that the loss in business continues to snowball. "Sales just drop off because the business isn't there. It builds against you because the holidays don't bring people in. When you are sitting in this big parking lot, and you are the only other business it directly affects you."

"The loss of center traffic generated by an anchor adversely impacts most every retail center format in some way, specifically those centers dependent on traffic-generating anchor tenants that generate impulse sales for other retailers in the center's tenant mix," says Joe Edens, chairman and c.e.o. of Edens & Avant, a Columbia, S.C. owner and manager of 250 largely supermarket-based neighborhood shopping centers in 19 East Coast states.

While Edens & Avant is not directly impacted by Kmart's closings, it has experience with losing anchors. "When an anchor tenant vacates, the most important goal for the center is to continue to adequately serve the consumer base in the trade area," says Edens. "If the center has location quality and convenience to a consumer base, we have the responsibility to replace the vacating anchor with a tenant that will continue to serve the customers. Unless the demographics 'move' with the anchor, which is highly unlikely, we ramp up to do whatever is necessary to replace the anchor. We have the flexibility to do all sorts of things—redesign, redevelop, reallocation of space, etc.—to attract the right tenant."

Those vacant Kmart sites should be able to attract a variety of food stores, office supply stores, junior department stores, department stores, and assorted other off-price or discount retail formats, he says.

Home centers might also be taking a look. "It is very difficult for Home Depot and Lowe's to find suitable space in old, existing centers," says John Connolly, v.p. at MGM Realty, Inc., a Reading, Pa.-based developer. "Since they need between 125,000 and 140,000 square feet, the disappearance of Kmart in some of these older centers is a win-win for them. It is opening up locations they otherwise couldn't get into."

While the big-box home centers need 20-foot ceilings, that doesn't have to be a deterrent. "It might cost Home Depot $3 or $5 a square foot to raise the roof, as opposed to $70 a square foot to construct a new building. For them to retrofit those spaces is a phenomenal opportunity. That is a huge plus for the neighboring grocery store, because it is opening the door for a non-competing magnet to come in as a new tenant," Connolly says.

Borrowing a line from Kmart's domestic goddess, Martha Stewart, Connolly says the discounter's downfall "is a good thing"—at least from a real estate perspective. It has brought out the real estate sharks, with landlords "foaming at the mouth" for a chance to buy back Kmart's dirt-cheap leases. "If it is a decent location, he might have an opportunity to get a Target or Kohl's. If it is an older center, it opens up an opportunity to put in a home center, which is gold," Connolly says.

"Because of Kmart's advanced site selection processes and their ability to choose high-quality real estate locations, their vacated store locations shouldn't be difficult to re-lease—if not to retail, then to another highly viable alternative," says Edens.

The rash of big name retail bankruptcies in the past two years, including Bradlees, Montgomery Ward, Ames, and Service Merchandise, has put the kibosh on the development of many new centers. "These kinds of vacancies put additional footage back on the market and slow the leasing process on existing available space. New development can slow considerably for 'much needed' space of specific format or size due to a perceived glut of big-box space," Edens says.

'Major holes' looming

But Kmart's loss will hurt neighboring stores, at least in the short term, particularly when chief competitors, like Target, are in hot new power centers a mile down the road. "Definitely there are going to be some major holes for long periods of time," says Chuck Bomley, principal of Plan B Retail Design & Project Management in Tolland, Conn.

"In addition to Bradlees, we have Ames up here, and they are having problems and also closing stores. You are not going to fill them overnight. And I don't think any of the developers are going to go in and do major subdivides. They might cut a 30,000-square-foot chunk out of a 75,000-square-foot Kmart," he says, noting that space might be leased to a Marshalls, TJMaxx , Bed, Bath & Beyond, or other power retailer.

"It doesn't necessarily have to be a devastating situation. It is more of a bleed effect where you have a huge empty anchor with no one going in there for a while," says Bomley.

Target and Kohl's have just begun their attack on New England, and Bomley thinks they might be primed to take over some of the Kmart sites. "They would be interested in some of the Kmart locations, particularly the larger ones," he says. "I think they would be leaning toward that, particularly right now with the way the permitting process is in the Northeast. To get anything of any substance is at least a two-year process."