What happens to all that Toys 'R' Us real estate?
The demise of Toys 'R' Us and its massive fleet of stores will leave a large amount of vacant real estate across the U.S.
The Wayne, New Jersey-based toy chain, saddled with billions in debt, announced it will shutter more than 700 of its remaining stores. The news sent landlords scrambling to find tenants for those locations that aren't owned directly by the 70-year-old company.
For those locations that are owned by Toys 'R' Us directly, we will see opportunist investors at the ready, according to Sharestates CEO Allen Shayanfekr, a securities law expert whose firm provides investors with a platform to participate in vetted debt offerings.
The New York Business Journal caught up with Shayanfekr to discuss the Toys 'R' Us bankruptcy, the opportunities available to commercial real estate investors, and which store locations are going to be in high demand.
What happens to the Toys 'R' Us real estate?
It’s no secret that retail-related real estate has been suffering for quite a while now. Toys 'R' Us typically operated in very large facilities — leaving few retailers that could actually fill its shoes. We anticipate that the Toys 'R' Us real estate that is rented will likely sit stagnant for quite a while before landlords are able to find suitable replacements. In the worst case scenario, those landlords that have mortgages may need to fire sell their properties.
Often, mortgages include debt service maintenance requirements which mean the lender could put the borrower in default if they fall below a certain rental income threshold. Most of the time, lenders have no way of tracking something like this. But with the widespread news of Toys 'R' Us going out of business, lenders will likely crack down, forcing the landlords to either sell or rent below market rates.
For those buildings that are owned by the retail chain, they will likely be liquidated to the highest bidder to make their lenders whole. This will provide for a very competitive sale in which real estate investors could bag themselves a nice deal.
Which properties/locations will be the most sought after?
Locations in heavy traffic and heavy retail areas will be the first to be targeted. For example, I imagine the three Manhattan locations will be in high demand. The Long Island City express store — located nearby several popular stores such as Stop & Shop, Marshalls and Old Navy — will also be in high demand. That particular store is located near a subway station and the highway, making it an ideal location for both foot passengers and those with a vehicle.
Most retailers prefer to be located nearby other similar business. This is something that may seem illogical due to the increased competition, but the mentality is typically driven by two theories. If competitor retailers are in the area, then they’ve already done their research on the need for such a business in that locale. Also, heavy retail areas are prime locations for traffic. You’re more likely to get someone to walk into your store if it’s conveniently located by other stores as opposed to off the beaten track.
Toys 'R' Us' troubles stem from a 2005 private equity (PE) deal inked by Bain Capital and KKR (NYSE: KKR). What role will PE firms play in handling the real estate?
They will try to take advantage of the situation. The properties owned by Toys 'R' Us are desirable, so they will be looking to purchase these locations at steep discounts.
What can Sharestates do to help investors?
We’re a lender/syndicator. There’s a possibility that anyone looking to make a quick purchase will come to a private lender like us for quick results, or even to syndicate the equity capital needed. Given the time constraints some landlords might face, it’s unlikely that banks will be able to finance these purchases and given the size of these locations, the market size of buyers could be relatively small — meaning buyers will need both debt and equity financing that can move quickly. That’s what Sharestates specializes in – fast capital.