What Toys R Us Might Guide As To The Future of Bed Bath & Beyond Real Estate

There are reports that a Bed Bath & Beyond bankruptcy may be imminent.

All 700+ Bed Bath stores (20+ MM square feet) could close in a liquidation.?

?But what would happen to the Bed Bath real estate if it was vacated?

? Toys"R"Us – which closed 700+ stores in bankruptcy – may provide a good example.

Just 5 years after all Toys R Us stores closed, more than 90% have been re-tenanted.

Burlington Stores, Inc. , Ollie's Bargain Outlet, Inc. , Big Lots , and Hobby Lobby are among the most common new users, each having opened in 30+ former Toys R Us stores.

Good locations, tight retail vacancy rates, well capitalized owners and certain aggressively growing replacement tenants contributed to the rapid re-tenanting of the Toys R Us sites.

And the same takeaways (and replacement tenants) may also fit the Bed Bath real estate.

Toys R Us filed for bankruptcy in September 2017.

At the time It was the 3rd largest retail bankruptcy in U.S. history.

Within a year all 725+ Toys R Us and Babies R Us stores closed for good.

But the real estate did not remain vacant for long.

Over 90% of Toys R Us and Babies R Us stores now have new tenants or uses -- less than five years after the final store closures.

But how similar are the Toys R Us and Bed Bath & Beyond situations?

Let’s quickly compare the real estate of the two chains: ?

• Number of Stores -- At the time of its bankruptcy Toys R Us operated approximately 725 stores.?Bed Bath currently operates virtually the same number of its flagship Bed Bath & Beyond stores (708 as of January 2023).
• Store Size – The average size of a Toys R Us store was 40,000 square feet.?Most Bed Bath stores range between 18,000 and 50,000 square feet and average approximately 30,000 square feet.
• Locations – Within the U.S. Toys R Us operated in 49 states (all except Wyoming).?Bed Bath & Beyond currently has stores in all 50 states.
• Store Type – While many Toys R Us stores were co-located with other retail tenants in shopping centers, just over one third of stores were freestanding buildings on dedicated land parcels. These freestanding buildings generally had limited restrictions on leasing to other retailers or redeveloping for non-retail uses.?The vast majority of Bed Bath stores are located in shopping centers, many of which will require a continued retail use and/or restrict leasing of the premises to tenants that may compete with other occupants.
• Ownership – At the time of its bankruptcy filing approximately 40% of Toys R Us stores were corporately owned.?This meant that the real estate needed to be first sold to new users or investors prior to initiating re-tenanting efforts. ?On the other hand, virtually all Bed Bath stores are leased -- so Landlords will likely begin marketing the space and working on leases to new users even before Bed Bath vacates.

So with many commonalities between the Toys R Us and Bed Bath real estate, would the same users that targeted Toys R Us sites also likely be candidates for the Bed Bath stores?

The most common Toys R Us replacement tenants by use type include:

1) Off Price Retail (30% of backfilled stores);

2) Furniture (20%);

3) Grocery (9%);

4) Craft Stores (6%); and

5) Sporting Goods (5%).

Four retailers -- Burlington Stores, Big Lots, Ollie’s Bargain Outlet, and Hobby Lobby – together accounted for approximately 150 former Toys R Us sites, or about 25% of all re-tenanted stores. ?

Additionally, three furniture retailers -- Ashley Furniture Homestores , Bob's Discount Furniture and Raymour & Flanigan Furniture and Mattresses -- opened in over 50 former Toys R Us stores.

These off price, furniture and craft retailers continue to grow their store bases and would also be a natural fit for much of the Bed Bath real estate, assuming they do not already operate stores in the same shopping centers or submarkets.

Other users that generally operate in smaller space footprints – such as ALDI USA , Five Below , Ross Stores, Inc. , and the The TJX Companies, Inc. family of concepts (e.g. Marshalls, TJ Maxx & HomeGoods ) – each opened in a double digit number of the Toys R Us stores that were demised into smaller suites for multiple users.?These retailers also continue to open new stores and would likely be interested in the Bed Bath real estate if it is divided into smaller suites.

Over 100 Toys R Us stores (~17% of re-tenanted sites) were converted into non-conventional or non-retail uses such as self-storage, fitness centers, and medical facilities. Others were retrofitted for automotive uses like car washes, vehicle dealerships and even Tesla service centers.

While some of the Bed Bath real estate could also be a fit for non-retail uses, it is unlikely that the same percentage of Toys R Us sites will be taken by non-traditional tenants since use restrictions at many shopping centers will prevent leases to self storage and automotive tenants as well as the redevelopment into other non-retail uses.

Why was Toys R Us real estate in high demand - and why would the same replacement tenants also target the Bed Bath real estate?

A few key points may lead to the answer:

• "Second Generation" Real Estate Focus: Both Toys R Us and Bed Bath stores were located in dense, high traffic retail trade areas where there has been very little new supply developed in recent years. In many cases, the only way for retailers to enter these markets is by taking "second generation" space once it is vacated by the original tenant. In fact, the business model of many of the Toys R Us replacement tenants is to exclusively pursue this second generation space for new stores as these spaces become available.
• Dominant Shopping Centers and Co-Tenancy: Like with Toys R Us, many Bed Bath stores are situated in prominent shopping centers with significant available parking, easy access, good visibility and co-tenancies that provide a strong draw for customers. These shopping centers are often the first -- and sometimes only -- choice for new tenants to locate if they plan to open stores in a particular submarket.
• Lost Sales/Market Share Capture: Despite the fact that the Toys R Us chain filed for bankruptcy, many individual Toys R Us and Babies R Us stores generated consistently high sales volumes and operated profitably on a "4 Wall" basis before the allocation of corporate overhead and debt. As a result, retailers that offer comparable products and/or target similar consumers as Toys R Us often have a unique opportunity to capture some of these lost sales by locating in stores with a proven sales record and customer base. This situation likely applies to many Bed Bath stores as well, resulting in an opportunity for new tenants to not only take a desired location but also to even capture some of the Bed Bath sales.

The takeaways from the rapid re-tenanting of Toys R Us stores are likely to also apply to the Bed Bath real estate in the event it liquidates and closes its stores:

1. Demand continues to be strong for Big Box real estate - especially among “second generation” users that seek stores that can be leased at lower rents and less cost to renovate (especially if they come with a proven customer base).
2. Well located Big Box real estate - particularly in dominant shopping centers - features attractive characteristics like high traffic, good visibility and unique co-tenancies that are desirable for many types of retailers (and even other types of users).
3. The bankruptcy of a large retailer does not automatically result in long-term vacancy. Toys R Us was not unique; many of the thousands of stores vacated by Kmart, Sports Authority and other bankrupt retailers were also backfilled or redeveloped with relatively short periods of downtime.

Ultimately long term retail vacancies will likely be concentrated in functionally obsolescent properties such as many enclosed malls.

And as for the Bed Bath retail real estate in a potential future liquidation?

It is likely to be in high demand.