Toys “R” Us & Its Impact on Retail Real Estate

The recent news on Toys “R” Us and their impending closures of 180 locations only added to the sea of closure news we’ve been swimming in these past two months and will likely continue to float through this first quarter of 2018 despite the strong holiday shopping season we saw at the end of last year.

As the numbers continue to come in, retailers will make tough decisions on how to handle their cost expenditures against revenue streams.

Unlike some recent retail bankruptcies for concepts that have struggled with relevancy issues, the challenges faced by Toys “R” Us were more about leveraged buyout debt. As the only remaining national toy store chain, they have not been immune to the challenges posed by newCommerce and discounters like Walmart, but their moderate decline in sales, combined with a high level of debt led to their filing.

Relevancy was not the issue here and that is one of the reasons why they were able to restructure and survive bankruptcy.

Toys “R” Us has a strong mixed property-type portfolio, which in their current situation has allowed them to make smart decisions on which locations will continue to thrive and which they should eliminate moving forward. Their store closure choices will affect a range of property types, as well as some stand-alone suburban and urban locations, but the greatest impact will be on Power Centers. Most of the announced store closures are leased by the company although a few are owned real estate properties.

Toys “R” Us’ Class B larger box locations, (50,000 SF and above) are looking to reduce their overall footprint, which may be more challenging for landlords to fill. We are seeing there to be a fair amount of grocery interest, even if some players like Lidl are downgrading expansion plans from aggressive to just strong. So while in the short term it may feel difficult to lease these larger spaces, we don’t anticipate being too many issues in the long term for larger space.

But definitely still more difficult than the smaller Class B junior boxes out there.

Overall, Toys “R” Us’ store closure rule will be “the smaller the footprint, the easier it will be to lease” after the company high-tails it out of these projects to make way for more efficient sales.

The fact that Toys R Us’ portfolio consists of very few challenged properties overall will also be a huge benefit as landlords aim to recalculate space usage and minimize vacancies in an evolving retail climate.