Sunday Summary: A Band-Aid for Rite Aid
Last weekend the retail market nationwide received a terrible blow: Rite Aid filed for Chapter 11.
Like their (slightly bigger) competitors Walgreens and CVS, Rite Aid is the New York City equivalent of the old-fashioned General Store — the place where Gothamites can find batteries, toothpaste, a toilet brush, nail polish, a bag of Doritos and a bottle of mouthwash at almost any hour of the day or night. (Oh, yeah — they also fill prescriptions.) Given its ubiquity and importance throughout the five boroughs, some New Yorkers will no doubt be surprised by this development.
They probably shouldn’t have been.
“Rite Aid has been going bankrupt for a decade,” Newmark’s Jeffrey Roseman told Commercial Observer. Part of it has been retail’s chronic theft problem; another factor has been rising rents; the company assumed huge amounts of debt over the last few years; and many stores have had trouble hiring and retaining staff. This is not even touching on the fact that earlier this year the federal government sued Rite Aid for essentially turning a blind eye to rising misuse of opioid prescriptions its pharmacies were filling.
“They’re not closing because there’s no business,” Roseman said. “They’re closing because they just sort of had a lot of stumbles along the way.”
Yes, stores will close. So far, 78 stores (across nine states) have been selected, including three out of the eight Rite Aids in Manhattan. And, unlike retailers with a piddling retail footprint, Rite Aids tend to be significantly large (averaging 11,000 to 15,000 square feet).
We’ll see who takes their place.
Speaking of retail….
We saw an interesting retailer take a lease in Southern California last week — but it wasn’t for a showroom or a sales floor.
We’re talking about Foot Locker, which signed a mammoth 361,000-square-foot pre-lease at El Monte Logistics Center in the San Gabriel Valley for warehouse space, making it the largest industrial pre-lease of the year.
At the same time, another big retailer was looking to ditch its retail space — the discounter 99 Cents Only Stores sold its 24-acre distribution facility at the Port of L.A. for a whopping $190 million to Dedeaux Properties. (Think of all the 99-cent dishes, and aluminum foil, and candy you could buy!)
But we were perhaps most excited by Petco’s new experiential retail space at the old Tammany Hall headquarters by Union Square.
As described, it sounds like a wonderland for animals: Entering the store King or Rover encounters trees, pet clothes, toys and the high-end Petco products. (Yes, cash counts with your dog, too.) Deeper into the space there are glassed-in grooming spaces (see and be sheared), one of which is emblazoned with “Ruff’s Barker Shop New York.” Elsewhere are offers of veterinary care and, of course, gourmet pet food. (Boasting that it’s even fit for human consumption. Score!)
You know who’s not looking for space?
There are many possible answers to the question above, but the one that came to mind recently was the federal government.
The General Services Administration has been on a cutting spree for the last few years, and according to testimony last month in the U.S. Senate: “With approximately half of the value of our leased portfolio expiring within the next five years, we can seize this opportunity” to cut more. The testimony came from Nina Albert, former commissioner of the GSA’s public buildings service, who added that this should happen “only if we are able to make the necessary investments in our owned portfolio.”
However, there was at least one government body that was looking to increase its footprint: the Los Angeles Housing Department, which has been trying to complete a 300,000-square-foot lease at the Gas Company Tower in Downtown L.A.
CO got wind of the deal over the summer, and it promised to be one of the biggest (and most needed) leases in a town where office deals have been moving at tortoise-like speeds, and at a property that was desperate for a tenant. (The property went into receivership back in April.)
Unfortunately, CMBS bondholders for the 54-story property rejected the terms of the lease.
And, not to pass judgment, but CMBS bondholders have to get serious. Not everybody can get Ralph Lauren to lease a quarter of a million square feet every day. There’s $13.6 billion worth of CMBS debt tied to Los Angeles office properties set to mature in the next seven years — the majority of which will mature in 2025. With vacancies exceeding 20 percent, a lot of these properties will either have to be refinanced or sold off. (Just like the Margaritaville Resort Times Square, which was sold off via UCC foreclosure to Arden Group last week.)
All by itself, the LAHD lease at the Gas Company Tower would have increased office leasing by 11 percent last quarter in L.A. Now the space is going to sit empty for the foreseeable future. It seems like the wrong time to be fussy.
Oh, and before we forget, one other big, big (but local) government lease last week: The New York City Administration for Children’s Services extended its 530,000-square-foot lease at 150 William Street in FiDi.
The number of permits for new multifamily units tabulated by the New York Building Congress is down this year. Way down. According to the trade group’s recent report, the figure plunged from 30,000 to 11,300 permits this year.
That sounds … catastrophic.
Actually, no! The report found that developers will spend $26.4 billion on renovations, rehabilitations and conversions (just not so much to build new units), which would actually be an increase of about $527 million compared to 2022.
And one can certainly see the hunger for multifamily — Sutphin Boulevard Equities just landed a $142 million construction loan to finish a 521-unit building in Jamaica, Queens; and a joint venture between Barings and Foulger Pratt plunked down $50 million for a 172-unit build-to-rent project in Wendell, N.C.
“As the world economy navigates the challenges posed by rising interest rates, multifamily housing has emerged as an increasingly popular choice for investors and renters alike,” CRED iQ’s Harry Blanchard wrote in CO last week. “In a rising interest rate environment, investors often seek assets that provide stable income streams to offset the potential decline in the value of their bonds and other investments. Multifamily housing … offers exactly that.” Amen, Harry.
It’s good to be king
With all the global chaos swirling around (and seemingly getting worse with each passing day), one might be tempted to shove your television into storage, take up yoga, and get your real estate news from CO’s print edition.
If you do decide to go that route, we know a storage guy: Brian Cohen.
The self-proclaimed “Storage King USA” is the president and CEO of Andover Properties — which has some $2.8 billion worth of self-storage assets (85,000 units in total), manufactured housing communities, RV parks, car washes, and who knows what else — who has done business with some of the biggest names in real estate.
He will make for a calming read this Sunday.
See you next week.