Borders Liquidation A Headache For Landlords

Borders's decision to liquidate promises to be a headache for downturn-weary landlords throughout the country but some will be worse than others.

A location near the New York Stock Exchange in downtown Manhattan is likely to get filled soon, according to Gene Spiegelman, the Cushman & Wakefield broker representing the landlord. It was one of the roughly 200 stores that Borders announced in February that it was planning to close.

But at the other end of the spectrum is Agree Realty Corp., a small real estate investment trust based in Farmington Hills, Mich. Borders is Agree's third-largest tenant and gets 9% of its annual rental income from Borders properties, according to research from Janney Capital Markets.

Many of Agree's properties are in markets where it is still difficult to find tenants. Andrew DiZio, an analyst at Janney, predicts that Agree will give up about five properties to lenders. "I expect a voluntary default on those mortgages," he said in an interview Tuesday.

A spokesman for Agree couldn't be reached. But in a regulatory filing earlier this year the company said it was in default on three properties secured by Borders.

Borders's liquidation announcement means that it will close another 399 stores on top of more than 200 closings announced earlier this year when it filed for bankruptcy protection.

Mall and shopping-center owners say they have been planning for this worst-case scenario. Some have already initiated discussions with possible replacement tenants and are considering plans to break up floor space that will be vacated by the large Borders stores to make it easier for a new tenant or repurpose it for mixed use.

For the malls and retail properties in secondary or weak markets, finding new tenants could be more of a feat as big retailers like Best Buy, which were rapidly expanding, are backing away from the big-box format and are opting for smaller stores.

"Demand for space of that size may be limited," says Cedrik Lachance, an analyst at Green Street Advisors.

Borders's largest landlords include Westfield Group and General Growth Properties Inc. Given that many of their Borders stores are located in high-performing malls, the two companies may have less of a difficult time filling the space as opposed to Pennsylvania Real Estate Investment Trust, which operates malls in weaker markets, Lachance said.

Alan Barocas, head of leasing for General Growth, said Tuesday the mall landlord has already found new tenants for some stores, but declined to give specifics. "We have been actively marketing them in anticipation of these locations coming back to us. That's not to say we will re-lease all of them soon, but we're pretty comfortable mitigating our risk on this," he said.

Barocas said one benefit is that many of those leases were signed about seven years ago at below-market rents. "We have the ability to replace tenants at rents that were above Borders's," he said.

Joseph Coradino, president of Pennsylvania REIT Services, says the mall company has leasing deals in the works for most of their soon-to-be vacant stores which are mostly in smaller locations. The company plans to break up a superstore in Newport, Va. into a restaurant and several stores. "We're probably further ahead than most," says Caradino. He said they already re-leased several spaces with local and regional book retailers.

-By A.D. Pruitt, Dow Jones Newswires, 212-416-2197,angela.pruitt@dowjones.com

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