Bed Bath & Beyond Seen Shedding More Stores If It Pursues Bankruptcy
As Vacancies Loom, Retail Analysts Examine Challenges Facing Landlords
By: Linda Moss
Bed Bath & Beyond is finishing up its effort to close roughly 150 stores by the end of fiscal 2022. (Getty Images)
Bed Bath & Beyond is already closing about 150 stores, and analysts and brokers say they expect the home goods seller to shed even more if it seeks bankruptcy protection in a move that could throw additional vacant retail real estate onto the market.
The activity comes as the U.S. retail sector mounted a comeback from the pandemic's peak in 2020 that surprised some industry analysts, with store openings outpacing closings and Chapter 11 filings declining significantly despite challenging macroeconomic headwinds. By contrast, the financial challenges facing Bed Bath & Beyond multiplied during the past year, setting up what analysts say could be this year's biggest struggle for a major U.S. retailer.
The Union, New Jersey-based company — owner of its namesake chain as well as Buy Buy Baby and Harmon — last week warned that its financial woes, namely plummeting sales and widening losses, are forcing it to weigh its options, including seeking relief in bankruptcy court. If that were to happen, several retail analysts and brokers said, any closing of more stores than announced in August would follow a Chapter 11 filing permitting the retailer to request approval to walk away from some unexpired leases.
Worst-case scenario, analysts say, Bed Bath & Beyond may not be able to secure the necessary financing or support of its vendors and shoppers to reorganize and continue operations. The retailer admitted as much, saying "there is substantial doubt about the company's ability to continue as a going concern," an indication that if the financial rescue efforts don't work, the company could consider liquidation, as did Toys R Us in 2018, with all its stores shut. The chain didn't immediately respond to requests to comment from CoStar News.
Bed Bath & Beyond's attempted turnaround — and heightened competition from Walmart, Target, Amazon and Costco — marks the latest disruption of the U.S. retail real estate landscape, which underwent a record amount of upheaval in 2020. That year, the peak of the pandemic, there were Chapter 11 filings and a record number of store closing by retailers.
A traditional anchor tenant at shopping centers, Bed Bath & Beyond could pose a challenge in terms of filling empty stores for some landlords, according to retail brokers, because of the large size of some of its space. And Bed Bath & Beyond store closings could affect billions of dollars of commercial mortgage-backed securities, or CMBS, loans for shopping centers, according to one credit ratings firm.
Others in, or following, the retail industry gauge the situation differently and see the glass as half full. Bed Bath & Beyond was savvy and chose attractive locations for most of its stores, making those sites alluring for potential new tenants, they said. And landlords stand to benefit by replacing underperforming Bed Bath & Beyond stores with more successful retailers who can pay higher rents and attract more foot traffic to a shopping center, according to brokers and retail analysts.
A Bed Bath & Beyond and Buy Buy Baby occupy a large chunk of space at Totowa Commons in New Jersey, according to a report from DBRS Morningstar. (CoStar)
Some are taking a wait-and-see attitude about Bed Bath & Beyond's store closings.
“So we are putting more real estate back out into the marketplace," Anjee Solanki, national director, retail services and practice groups at Colliers, told CoStar News. "Are there enough retailers out there that can absorb [it] is still to be determined. ... So we may have some real estate, actual physical real estate, that will be coming to market that may not be captured as quickly as one may like because of these shifts, shifts down in square footage [by retailers reducing their store footprints]. It’s not a significant concern, but it’s something to watch and manage.”
The amount of vacant retail space that could end up going on the market may be exacerbated, as well. Party City, another New Jersey-based retailer like Bed Bath & Beyond, is preparing to file for bankruptcy, according to a recent report by The Wall Street Journal.
Party City, headquartered in Woodcliff Lake, didn't respond to an email seeking a comment.
Major Tenant Cuts Back
Bed Bath & Beyond's three chains occupy just under 26 million square feet, according to Brandon Svec, national director of U.S. retail analytics for CoStar Group, citing the research company's data. Of that, core chain Bed Bath & Beyond has 24 million square feet, with the remainder taken by Buy Buy Baby and Harmon, he said.
This week Bed Bath & Beyond posted an updated and more complete list of the stores it plans to close, a number of which have already shut. On a third-quarter earnings call, CEO Sue Gove said the company is on track to finish its roughly 150 closings of underperforming stores by the end of fiscal 2022. The company reported that it now has 949 stores, including 762 Bed Bath & Beyond stores, 137 Buy Buy Baby stores and 50 Harmon stores.
In some cases, closings that are part of Bed Bath & Beyond's previously announced plans, or additional ones that could result from a potential bankruptcy, may cause real problems for landlords, according to Svec and others.
"Bed Bath and Beyond is a major tenant in many power and neighborhood centers," Svec said in an email. "The typical Bed Bath & Beyond occupies right around 20% of [gross leasable area] within its center. Canceling leases will create issues for all landlords, but those that have near-term loan maturities, meaningful vacancy already in their center, or are located in secondary locations will be most at risk."
Last July, ratings firm DBRS Morningstar issued an alert saying that there may be some risk for loans on properties with exposure to Bed Bath & Beyond because of store closings.
DBRS identified 126 retail properties tied to CMBS loans with balances totaling nearly $4.4 billion.
A Bed Bath & Beyond store in Ann Arbor, Michigan, is on the list of sites that the retailer is closing. (CoStar)
“Potential additional store closures resulting from Bed Bath & Beyond continuing to retrench present significant risk for properties with near-term lease expirations because of uncertainty over demand and the potential for renegotiated lease terms at lower rents,” DBRS said in that report. “We identified 21 Bed Bath & Beyond properties in CMBS loans, backing $659.1 million in allocated property balance, with a lease that will expire through year-end 2023, and 11 of these properties (backing $299.2 million) would be materially affected if the retailer were to depart at lease expiration.”
There was a $60.5 million loan noted on Huntington Oaks Shopping Center, a 328,351-square-foot property in Monrovia, California. That lease was set to expire at the end of the month.
Edward Dittmer, DBRS Morningstar senior vice president, cited another example from that report in an interview with CoStar News. Bed Bath & Beyond occupies 34.5% of the space at Totowa Commons in Totowa, New Jersey, which has a loan for $50.8 million, Dittmer said. That lease is set to expire on Nov. 30 this year.
“You’re certainly going to see some properties that have a big Bed Bath & Beyond presence ... hit hard,” Dittmer said. "So there’s certainly some risk around the market."
Oak Street’s Sale-Leaseback Deal
While Bed Bath & Beyond may occupy a large percentage of space at some shopping centers such as Totowa Commons, in others it may only represent 10% to 15%, and landlords for those properties will have a chance to re-tenant those smaller vacancies over time, according to Dittmer.
Roughly a half-dozen of the shopping centers with a Bed Bath & Beyond that DBRS mentioned in its report are on the updated closing list, including; Northville Village in Northville, Illinois, with a $26.2 million loan; Perrysburg Market Center in Perrysburg, Ohio, with a $13.5 million; Ward's Crossing in Lynchburg, Virginia, with a $11.5 million loan; and Hilltop Shopping Center in Redding California, with a $10.5 million loan.
In December 2019, Bed Bath & Beyond sold some of the real estate it then owned to Oak Street Real Estate Capital in Chicago for $267.3 million in a sale-leaseback deal. That included its headquarters complex in Union, a distribution center, and 14 stores totaling 2.1 million square feet, according to CoStar data. Oak Street has already sold at least one of these properties, a 811,000-square-foot warehouse in Pendergrass, Georgia, in August 2020 for $43.9 million, according to CoStar data.
Oak Street declined to comment on the future lease status of the Bed Bath & Beyond stores it purchased from the retailer to lease back to it.
In the years before and since the pandemic, Oak Street carved out a niche as the buyer in sale-leaseback deals with companies including Big Lots, Badcock Home Furniture & More and First Midwest Bank that were looking to free up cash by selling their real estate portfolios and signing long-term leases with Oak Street.
The company is part of New York-based Blue Owl Capital, which acquired the Chicago private equity firm in October 2021.
Broadly speaking, Svec said a Bed Bath & Beyond bankruptcy and closings likely won’t affect the U.S. retail sector greatly in and of themselves.
"The retail market, and power/neighborhood center segments specifically, are in a fundamentally tight position with limited well-located big-boxes available," Svec said. "As such, the stronger locations will back-fill relatively quickly and in many cases, landlords will benefit from a higher rent (and potentially stronger credit depending on the back-fill tenant).
Over 95% of shopping center space within 1 mile of a Bed Bath & Beyond location is leased. In addition, there is an average of just 0.9 available spaces between 20,000 to 50,000 square feet (the typical range for a location) within 1 mile of a Bed Bath & Beyond occupied property."
But he also added a caveat.
"However, when combined with Party City [potential bankruptcy] and a few others, it does have the ability to create weakness in pockets and weigh on the sentiment surrounding the retail operating environment right as it was when starting to improve," Svec said.
Locations Expected To Attract Interest
Several brokers and retail analysts agreed that many Bed Bath & Beyond stores are in prime locations, and if they are vacated they should be of interest to new tenants.
While a relatively large amount of Bed Bath & Beyond space will be coming onto the market almost at once, the retailer has "great real estate across its portfolio” with good parking, visibility, access, co-tenancy and strong demographics in its surroundings, Curtis Nassau, executive vice president at Ripco Real Estate, told CoStar News.
His firm was retained by a landlord last year to find a new tenant for a large Bed Bath & Beyond store at The Atrium at Fashion Center on Route 17 North at 34 E. Ridgewood Ave. in Paramus, New Jersey. The retailer is slated to leave at the end of the year. “There is interest” in the location, according to Nassau.
Bed Bath & Beyond is slated to leave The Atrium at Fashion Center in Paramus, New Jersey, at the end of the year. (CoStar)
Bill Read, executive vice president at Retail Specialists, had the same take as Nassau on Bed Bath & Beyond's vacant space.
“That’s always going to be a lot to hit the market, but the market is short on anchor tenant space and there will be demand,” Read told CoStar News. "In general, Bed Bath & Beyond has some fantastic shopping-center locations. They’re generally first rate, and all will get interest.”
One drawback is that the retailer has some larger stores, which can be as big as 50,000 square feet, according to several brokers and others. Solanki and Colliers' national retail research manager, Nicole Larson, pointed out the trend of retailers like Barnes & Noble and now even grocery stores of downsizing their brick-and-mortar store footprints. That could leave fewer tenants interested in some of the former Bed Bath & Beyond stores, they said.
On the Bright Side
On the flip side, "there are still a lot of retailers on the East Coast that haven’t made their way over to the West Coast and vice versa," and they could be potential tenants for Bed Bath & Beyond space, Solanki said. And retailers including expanding TJX Cos. could use larger Bed Bath & Beyond space to house their combination T.J. Maxx and Homegoods locations, she said.
"There will always be the T.J. Maxx’s, Homegoods and food markets who might very well fill the slots that are going to become vacant," Chuck Lanyard, president of The Goldstein Group, said in an interview. "But in certain areas I imagine it’s going to be a lot slower.” Both Read and Lanyard predicted that Bed Bath & Beyond will continue reducing its physical footprint, perhaps in a variety of ways. Read said he expects Bed Bath & Beyond may choose to close stores, up to 100 more overall, in smaller markets and have clusters of stores in large regions where it can maintain tight management control and create infrastructure for those locations.
Going forward, bankruptcy or not, Bed Bath & Beyond could follow in the steps of some of its peers by reducing the size of its bigger stores, possibly by subletting space to other retailers, Lanyard said. He added that could mean smaller, but more profitable, stores. Or it could partner with other retailers to open store-in-store boutiques, as Macy's has done with Toys R Us and Kohl's has done with Sephora, at Bed Bath & Beyond stores, according to Lanyard.
If the retailer does decide to file for Chapter 11 bankruptcy protection, and opts to reject some unexpired leases, it could be good for landlords, according to Read.
“In most cases everybody wins if you reject the lease because you couldn’t afford to pay the rent and the landlord doesn’t want to have someone who can’t pay the rent," he said.
It's a better outcome to remove an underperforming store in a shopping center and substitute "a more relevant retailer [that] takes its place and creates more and better activity," according to Read.
In a bankruptcy proceeding, Bed Bath & Beyond could try to sell or auction off some of its leases, he said. But the overall process could be an uphill battle for the beleaguered retailer, according to Read. If Bed Bath & Beyond follows in the past pattern of Toys R Us and The Sports Authority, and buyers don't express interest in its leases, it could end up in a liquidation of the company, he said.
“The long-term question is if you file bankruptcy, can you change your stores enough to excite the consumer to come back to our store," Read said. "And that’s a very tall order and most retailers can’t fulfill that.”