Vol. II, No. 5, August 2002
ROAD KILL DÉJÀ VU
In last month's issue of this eNewsletter (past issues are now available on our web site) we discussed what we call "road kill amnesia," the phenomena when developers of new projects fail to learn from the industry's past experience.
In the early 1990s, there was a glut of vacant retail space as a result of the earlier real estate recession. The availability of inexpensive rents and financing fueled the development of a large number of indoor family entertainment centers, especially in the Northeast area of the US. The drive to open new businesses blinded many developers to important critical issues for long term success. As a result, the majority of those FECs are now industry road kill.
Conditions are now becoming ripe for a déjà vu repeat of that cycle of boom and bust. We only hope that won't be case. In the past three years, three Northeastern discounters--Ann & Hope, Bradlees and Caldor closed their stores. Then, earlier this year, K-Mart announced the closing of 284 stores as a part of its Chapter XI reorganization. Many retail analyst believe the number of K-Mart closures will ultimately be even higher. Then on August 15th, Ames, a major discounter in the Northeast, announced that it is going out of business and shuttering 327 stores by the end of the year.
With a glut of vacant retail stores, landlords will likely become very aggressive in cutting rent deals and even giving improvement allowances to any warm body they can find. Many of these discount stores were anchor tenants for strip shopping centers, so landlords may be very receptive to obtaining FECs as replacement anchors.
Investor financing is likely to be more available to FEC developers than in the past few years due to the past year's dive in stock prices. The stock market is no longer the golden investment choice and a lot of money is looking for alternative investments.
These two conditions, cheap rents and money chasing deals, could easily fuel the development of many FECs that should never be built due to bad locations and poorly executed projects--the continuing spread of road kill amnesia. At the same time, the conditions can prove very profitable to FEC developers who tap the industry's earlier lessons and are careful to not rent stores only because they are available, but rather only select good locations. Bad locations last forever.
