End of Toys R Us Leaving Glut of Vacant Space in Lower Quality Locations

The glut of vacant retail real estate space is only going to grow as consumers’ preference for the online versus brick-and-mortar shopping experience continues to claim victims. Toys R Us is the latest and not unexpected retailer demise, and its planned liquidation of as many as 700 stores across the United States is expected to leave millions of square feet of space vacant.

Nothing’s certain about the extent of the potential damage, though, as the company is still trying to negotiate possible rescues. One would combine its 200 top U.S. performers with its Canadian operations, for example.

Either way, there’s still going to be a lot of retail space available, even though landlords should have anticipated the closing given the chain’s long-standing issues. What will make the outlook murkier, though, is the patchwork strategy Toys R Us has used in choosing sites for its stores.

Many of the holes that will be created with the Toys R Us closing will be at strip shopping centers. A percentage of strip malls in the U.S. are in fact doing well – like those that have managed a solid tenant mix of Internet-resistant stores and other concerns like restaurants and specialized medical services like physical therapy services.

But over half of the Toys R Us locations in the U.S. are in what the real estate industry considers low quality, and that will be troublesome to landlords looking to fill their space at similar rates (if they are able to fill them at all).

And it’s not just the quality of the malls that’s an issue. The average Toys R Us space is around 30,000 square feet, when the biggest retail demand seems to be for 25,000 square feet or less. Retailers of a similar size to the chain that might otherwise be interested in the better locations are staying where they are and remodeling or refocusing on their digital capabilities. And while smaller stores are in Target’s sights, it’s eyeing cities and college towns for its expansion – not necessarily where Toys R Us has been situated.

Meanwhile, if the future of the chain’s Canadian operations seems appreciably brighter than in the U.S., it may be due to the “location, location, location” emphasis of the expansion strategy that started in the 1980s.

The Toys R Us Canadian footprint has been far different than in the U.S., with many in prime locations and a mix of big and smaller stores. While some of the properties may have below-market rents, landlord exposures would still be far less than they would be with such older retailers as Sears.

The slow demise of Toys R Us is a story that is still unfolding, and the impact on the commercial real estate market is just one of its various complications. It will be interesting to see how much creative use is made of the space – and how many and for how long lesser locations stay vacant.