Toys R Us closures will whack retail landlords already smarting from big-box tenant losses

Plans by Toys R Us to shutter its nationwide empire of big-box stores that sell toys, kids' clothing, and baby goods are poised to empty nearly a million square feet of retail space in the Philadelphia region, a new headache for landlords already seeking tenants for properties vacated by other bankrupt and shrinking retailers.

Wayne, N.J.-based Toys R Us Inc. operates 34 Toys R Us and Babies R Us stores in Southeastern Pennsylvania, South Jersey and northern Delaware, accounting for 967,544 square feet of space, according to data compiled by real estate market tracker CoStar Group.

The chain owns just nine of those properties, leasing the others from commercial landlords who are soon to be faced with finding new tenants amid a dwindling pool of users of big-box spaces.

Chains that severely cut back their regional footprint in recent years have included department stores Macy's, JCPenney, and Sears and electronics retailer HHGregg, which went out of business.

"Any retail landlord over the decades has always seen retail concepts fail," said Scott Crowe, chief investment strategist at CenterSquare Investment Management in Plymouth Meeting. But "you used to have a pretty good core of like tenants to put in that space, whereas today the overall tenant pool is actually shrinking."

The area's Toys R Us and Babies R Us stores are among 735 locations nationwide that the brands' parent said Thursday it would seek permission in bankruptcy court to close. The company filed for Chapter 11 bankruptcy protection in September, amid a loss of customers to shopping websites and mounting debt.

The Thursday statement announcing the closures did not specify how many jobs would be lost, but Toys R Us stated in its most recent annual report that it employs 36,000 domestically.

"I am very disappointed with the result, but we no longer have the financial support to continue the company's U.S. operations," Toys R Us chairman and chief executive officer Dave Brandon said in the statement.

Michael Gorman, a principal at Mount Laurel-based retail brokerage Metro Commercial, said owners of the better placed of the region's Toys R Us stores should be able to attract new tenants, while those in more fringe locations may struggle.

"Quality real estate will be fine," he said. "It's location, location, location."

Eric Knopping, senior vice president at the Blue Bell-based Goldenberg Group, which owns the 43,314-square-foot Toys R Us store building at the Court at Oxford Valley, said in an email that the company had started seeking a replacement.

"This availability will provide an opportunity to bring new, exciting retail to a great market," he said.

Kimco Realty Corp. of New Hyde Park, N.Y., which has Toys R Us as a tenant at 23 sites nationwide, including its Castor Place center at Castor and Cottman Avenues in the Northeast, likewise cast the closures in a positive light.

With Toys R Us signed to leases with rents that are 15 percent to 20 percent below current market rates, the departures give Kimco a chance to "improve our tenant mix and drive future [operating income] higher," it said in a statement.

Kimco is already spending $70 million on a renovation plan at Suburban Square in Ardmore that includes work to make way for a Life Time Fitness health club in a building that previously accommodated Macy's. The plan also includes a 625-space parking garage with ground-floor retail space and an expansion of a Trader Joe's food market.

Another big retail space being radically retooled in the area is the former JCPenney store at the Willow Grove Park mall, which owner Pennsylvania Real Estate Investment Trust is renovating into a Studio Movie Grill cinema-restaurant hybrid.

Such conversions, however, aren't cheap, especially compared with tenant swap-outs in the past, when more users with similar big-box needs were prowling the market for space, said Crowe.

"Repurposing these assets to new uses takes a lot of capital," he said. "That paints a very challenging operating environment to retail landlords everywhere."