Guest: Karly Iacono

Topics: Bed Bath and Beyond lease auction, DTC brands, retail trends

Transcript:

Chris Ressa 0:00
This is retail retold the story of how that store ended up in your neighborhood. I’m your host, Chris Ressa. And I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC management

Karly Iacono 0:24
Hello, friends, and welcome back to what’s in store with Karly and Chris, the show where we cover hot topics at the cross section of retail in real estate. I’m Carly Iacono. And I’m joined by my co host, Chris Ressa. Chris amazing to see you how are you today? I’m doing great. How are you live in life doing great no complaints.

So we have a really fantastic sort of summer recap for all of our listeners. Today we’re going to cover an update on the Bed Bath and Beyond lease option bankruptcy. We’re going to cover some new information on DTC and store and store concepts. So we got a lot of good information. And we’re happy everyone listening could join us today. Well, speaking of summer recaps, I saw you were bungee jumping off of skyscrapers. What was that all about? I mean, sort of, sort of all the most I did this crazy experience called City climb at Hudson Yards in Manhattan. It is the tallest open air building ascent in the world to how it works. You go you get all harnessed up hardhat safety briefing, they give you a breathalyzer like it is no joke, all these questionnaires. And then you climb up the outside of Hudson Yards and hang over at 1200 feet in the air off of this like see through platform just hanging over the edge of the building. And then you go back down. It was maybe insane, but so much fun. Highly recommended. When you say go back down. Are you going back down like scaling the side of the building? I wish they wouldn’t let me do that. To be honest. I was like I really felt like that was a missed opportunity. But no, you go back down a few stairs, they take you out of all your safety gear and whiskey down the high speed elevator. So that part is very unexciting. Okay, got it. But they also do it at night. So if you want to go back, I’ll go anyone listening, you want to go back we’ll do a real estate trip. Was it scary or going up or down? It was definitely scary going up because it was really really windy. User incredible. But there’s just nothing around you. And that is very, very high, insanely high. Right at the very top of the city. Nothing else even close to the same elevation when you’re up there. It’s amazing. So good times good times. That’s how I kicked off my fourth of July which was great. Got it. Well cool. Good for you. And I hope you were finding summer adventure as well. Good time with the family at the beach. Anything exciting planned in your world. Nothing like jumping off a building. So all right. Next month, you can come recap with us next month, you’ll find that perfect.

Alright, let’s jump in to Bed Bath and Beyond. And really not just Bed Bath and Beyond but the overall benefits of retail bankruptcies. And we’ve touched on this in a few different episodes, but I’d love to kind of look at it from the landlord perspective. Other retailers perspective and of course lenders as well. So why don’t we start with the landlord. When you hear bankruptcy? The first thing obviously first reaction is ah, but not in today’s market. So being a landlord, what is your feeling on having a vacancy or a retail bankruptcy and one of your centers?

Ressa 3:44
Well, I think it all depends. The reality is there are some bankruptcies that are painful for the landlord but there’s some that are opportunities right I think when we go back in time to like the whole Sears Kmart I think if we look today and we looked at all the Kmart vacant K Mart’s that were and then you know so many are leased today, I think we would say that the landlord community has brought such a more vibrant

Ressa 4:19
well trafficked retail offering to the market so many of those are like you know, we’re we’re split up into multiple things like you know, call it a TJ Maxx or Ross and five below an Ulta and maybe a Chipotle with a you know, Chipotle on the end and that creates more economic output for the entire trade area. It created jobs and made a more vibrant traffic you know, community gathering place so I think in general, right in that scenario that was like such a long waited like everyone was like waiting for this to happen, and you know, at the time Uh, you know, in some properties, you would probably say, what would you rather have, you know, that retailer hanging on Kmart hanging 100, which you’d like the opportunity to actually, you know, return it that box, there’s always a scenario where, you know, the tenant leaving might be above market rent, and if they leave, you’re not gonna be able to replace the rent. But I think in today’s market, so the fact that there’s a lot of opportunities for landlords to get the space back earlier than they thought, and either get a higher rent, or maybe unlock of redevelopment or something even bigger.

Iacono 5:34
So what this is telling me is, it’s really a chance to re examine the center breathe new life, and like you said, It almost reminds me of term limits on politicians, right? After so many years, sometimes it’s just time for a change, and you need new energy, in politics or in your shopping center. But the key here is exactly what you said, Chris, it’s how your rent that you’re replacing compares to market, if it’s a really old lease this is could be a huge opportunity. If it was a really expensive build out for the tenant, and in turn, they gave you high rent, and now you’re stuck with above market rent, then it could be more of a challenge to replace that and maintain the NOI in the center. But I think overall with vacancy levels as low as they are, and a lot of legacy retailers that are turning over, it seems to be a net positive for landlords. And I think you would agree No,

Ressa 6:26
I think so. And I think that the reality is, the time that it really impacts the macro landscape of retail real estate is when there’s a significant amount all at once, right? So back in, oh 809. And you had like circuit linens, and all these groups going and closing so many stores, but the world has changed a bit. So I I’m a landlord of to Bed Bath and Beyond stores. But in I don’t know, as recent as 2015 16, I had double digit bed baths. And so I think one of the things that’s happened, that was there’s more frequent today than in yesteryear is some of these retailers, when they start to get in trouble, they start pruning some of the stores out. And so I would argue that a lot of the Bed Bath and Beyond already have former bed baths already have new tenants in them before that bath even filed. You know, they at one time they had, you know, so many stores, I think the amount of stores for sale at the bankruptcy was like 375 leases. You know, I don’t know, I don’t know what it was, you know, in 2009. But I think they had a lot more stores. So even if a couple of retailers file, they’re still it’s probably the last straw, it’s still not this significant volume of supply coming to the market that, you know, disrupts the demand that’s there today.

Iacono 8:13
And this is looked at as a good thing because of where we are with vacancy in the market too. As we’ve said in so many episodes, we are at historically low vacancy levels, actually the tightest market since 2005, when CBRE began tracking tenant vacancy. That really isn’t too right for sure.

Ressa 8:32
I would say, when we say it’s a good thing, I would say there’s bankruptcy in general is not a good thing. People are losing jobs. There’s a lot of you know, there’s a lot of legacy in histology and Bed Bath and Beyond. It’s a retailer I’ve loved for years. I think there’s I think what we’re talking about is there are potential positive outcomes that could come from it.

Iacono 8:55
Right? Very fair, good distinction, very important upgrades. One side we don’t look at as often is what this means for other retailers. So Bed Bath and Beyond had about 7 billion of sales in the last trailing 12 months. So tremendous number, where is all of that volume going? You know, consumers aren’t just going to stop buying the products that they use to buy a Bed Bath and Beyond. So who’s benefiting? And you know, I think this is something that we don’t really talk about when there is a larger bankruptcy. Other tenants do do profit from this. So where do you see that market share being picked up?

Ressa 9:37
You know, it’s a question I’ve been asking and haven’t seen a lot of headline news about and I think, you know, I’m often taken back to Toys R Us tours Eros was, you know, when they filed they were like number 265 on fortune 500. It was pretty wild. They were they were really up there and By the end they had like 13 billion in retail sales. And so I was like, okay, they’re gone, like kids still want toys, at least mine do. Where’s his toy business going? And we saw, I don’t think there’s like a clear answer even to that. But we saw target, and Walmart and Amazon pick up all these toy sales. And so I think if you go into like Target, like the toy section, and target is huge, like, I know, because I’m there. It’s pretty big, like any type of toys you want your kids want. They’ve got a lot of different variety and depth of selection, which I’m not sure they had pre Toys R Us, maybe they did, but it’s it’s pretty wild. So I think you saw some of that. So I think my point is, I think some of the mass merchants are really good at picking up share as a as a global cohort. So you’ll see that but I’m fascinated like, you know, The Container Store dorma fi partnership to me is really cool. dorma Pfizer, Cool story, this young woman and her mother couldn’t really, you know, get the dorm when she was going to college set up how she want there was no retail offering. They created an online business called dorm, a phi and Container Store just partnered with them. And there’s going to be dorm of faiz inside the Container Store, which I think is really interesting, because Bed Bath and Beyond had such good they had a lot of niche businesses in this big business. They were really good at bridal registry, they were really good at baby registry, they were really good at back to school for college and setting up the dorm. They were then a real big focus on this. I don’t know who’s capturing that. But the Container Store has gone right after I think it’s fascinating. And you know, kudos to them. And we’ll see who else starts to try to pick up some stuff. I

Iacono 11:56
think target does that right back to college. But Bed Bath and Beyond had such a unique presence when he went in the store, right? Their actual setup, you felt like you were there, you could pick all the pieces. So I’m wondering if some of the other mass merchandisers will try to capture maybe that’s exactly what container stores during the dorm have. I capture that feeling when you go in that you see the whole room put together. And it’s not just ordering individual products, one off, like you might do on Amazon. So that could be an opportunity. And then

Ressa 12:26
and then on an individual store perspective, like we saw this with JC Penney and Kohl’s were like in an individual market, where maybe there’s like a JC Penney and Kohl’s and that was like the two dominant apparel retailers. When JC Penney left at market colts did see a pickup in that specific trade area. And they probably didn’t capture it all but they captured a bunch. So I think in some areas, you’re going to you know that the market share is gonna get dispersed depending on who’s in that local trader,

Iacono 12:57
right? It’d be more regional conversation. The last thing I want to touch on before we move on to more details on the bed bath lease option is how lenders are viewing bankruptcies in today’s market. So we’re seeing a lot of loan covenants tighten up, obviously, lending standards have changed tremendously in the last six months. Have you had any issues? Or have you seen any anything in the market where there’s a vacancy in a center and the lender says, we’re no longer comfortable with this loan? Right? Maybe the coverage ratios aren’t there? And we’re calling the loan or what is the lender perspective on retailer bankruptcies that you’re seeing?

Ressa 13:38
I don’t know that it’s any different than it’s historically been. Typically, that’s all spelled out in the loan docs. It’s like what happens to a vacancy. So I’m not going to say that lenders aren’t concerned about retailers going bankrupt, but they’ve typically hedged and mitigated themselves on the front side of the loan docs in the event of, of, you know, large vacancies happening.

Iacono 14:06
Okay, that’s good to hear. So you don’t think there would be less workouts or more workouts because lenders don’t want properties back given the challenge in the capital markets, it’s more just spelled out in the loan documents, and then discussed or negotiated, let’s say on an individual basis,

Ressa 14:21
I think it’s, you know, the impacts to the capital markets are so robust that no one bankruptcies like, you know, making market changes to what’s happening.

Iacono 14:34
Okay. All right. Good to hear. Let’s move on to your experience with the Bed Bath and Beyond lease option, which is fascinating to me. So, from what I was seeing there were about 153 leases that just went up for auction and I think about 109 traded, right?

Ressa 14:54
Yes. So they, what happens was what happened was it Before the first auction was on a Monday, and the Thursday before you had to submit what they called a qualified bid on Saturday, if you qualified, you could show up to the auction on Monday. And then that bid would stand. If they wanted, once you submitted a bid you’re locked in, at that minimum, that would stand if there were no other bidders. And they said, Yes, we’re gonna take this.

Iacono 15:30
So who was their bidding? Right was when were you in person did you mail in your bid personally, and then who else was around you other landlords, tenants, give me an overview of the landscape.

Ressa 15:42
So on Saturday, you didn’t know who was there. And then on Monday, you showed up, you’d had to have like, whoever was going, they had to say they were going and you had to be on a list, you have to be someone who got a qualified bid, you had to be on a list, then you walk through the doors. And the landscape was a variety. It was landlords and other growing retailers who wanted to be there. I think those were the two biggest food groups at the lease auction. And yeah, and there was four phases of bidding. So there was there was the first set of leases with leases that they received only bids from landlords, the second phase of leases were bids they received only from retailers. And the third phase was competitive multiple bids for one lease. And then the fourth phase was the package deal that Burlington me.

Iacono 16:44
So I’m gonna just break this down on a more elementary level for some of our listeners who aren’t in this space day to day and correct me if I’m off in any part of this, Chris, but the auction is for the lease. And this has nothing to do with the real estate, nothing to do with the assets. This is just for the right to take over the remaining lease terms as they stand, right. So if there’s eight years left in term, and you really want that location, and you’re at competing retailer, you can come pay a premium to take over the remaining lease with all in place terms and kind of slide into the position. Correct? Yeah,

Ressa 17:19
generally speaking, I would say that’s correct. I’m not sure. Every piece of the legal way you said it was right. But generally speaking from

Iacono 17:26
it’s actually business wise. Yes. Right. Right. So the fact that retailers are paying just to take over a lease, instead of going to sign their own new lease somewhere else really also points to the tightness in some of these markets where these, these transactions went down. I think it’s amazing. They would pay such a premium.

Ressa 17:45
Yeah, I was. I was pretty shocked by some of the premiums that were paid for some of the leases. You know, in some of the places I was kind of sitting there going, you know, saying to my the my colleague next to me, I was like, we have to go and see if we can buy that center. I can’t believe all these retailers are like competitively bidding on a vacant space to be in the center. Is there no other shopping centers in the market? Is there is there just to see what’s going on?

Iacono 18:13
Right. I read that was it Macy’s paid 1.2 million to take over at least in Winter Park, Florida? Yeah. Anyway.

Ressa 18:22
Yeah. So that that I was watching that as it went down that, you know, and Macy’s had a team there, and like, they were pretty sophisticated on how they were doing their bidding. You know, they were they were going back and forth with Michaels on that one and ended up. You know, it’s like in 25,000 increments from 100 grand up, they went all the way up to one point. Wow. So yeah, it was it was really wild to watch.

Iacono 18:52
Amazing. And what other retailers Did you see competitive while you were there? Who else got really excited?

Ressa 19:00
So Burlington was there Macy’s? Michaels? Barnes Havertys was there Ali’s was there Scandinavian design. There’s a significant amount of different retailers, you know, the Scandinavian design by PJ superstorms their Scandinavian design and Havertys re more planning was there that kind of makes sense for me because the you know, the bed bath home use provision probably made sense. I think and that’s another thing, which I think is really telling. So for 153 bids. I think I think you know, some might think about you know, that’s less than 50% of stores got bid on. Well, there’s a couple of things one, the there are a lot of other stores where the retailers decided their best path isn’t to buy the lease in bankruptcy court is to try to let that lease go back to the landlord and make a direct deal with the landlord. Instead of taking over someone else’s lease, you know, we have a center with five loi guys with a bed bath, and no one bid on that lease. But here’s why. But here’s why. Because you’re buying an asset. So the first thing that the lease needs to have is term, right? So my lease has one year of term, one five year option, if very few leases are trading sub 10 years of term, right, that’s the asset that the bankruptcy court is selling, right that the debtors are selling is I have this right to this space for a period of time. So if you think about that, on the space that I have, which is one year term, one five year option, if a landlord, I mean, if a retailer bought that, and then in six years, they spent all the money to turn it into whatever their store was, there’s finally starting to grow sales, then six years, they had no options, I could just terminate them and get someone else in. So the first thing they need is terms. So there was a lot of lease that the amount of leases that were what I called sub $10 A foot and sub and more than 10 years of term was give or take a little north of 100. So I think, you know, when you’re thinking about this in the market, like, I would say that almost every like market lease with 10 years of term get like it felt like it almost got a bid that that’s obviously aggressive statement. But the point is, you know, there was a lot of, you know, Bed Bath and Beyond over the last few years where they were renewing the lease with the landlord, and maybe it was a kick the can down the road, like a two year extension. Right. And so just, you know, we’re not sure how we’re doing, you know, I’m gonna, if you want to renew for 10 years, I’m gonna close. So they make a deal for two years, something like that. And the landlord and retailer kicking the can down the road. So that lease being sold. There’s not a lot of bikes,

Iacono 21:59
right? Because there’s not a lot of long term value. And what are the options look like? And a lot of these I mean, is let’s say there is the two year term, but maybe there’s 15 years of options

Ressa 22:08
there all over the board, you can go to a website and look at every lease that was for sale. Okay. And as the rent the term, the location, the options. But the other thing, right, that I was mentioning is the use restrictions in a shopping center. So if the tenants lease says, If Bed Bath and Beyond lease said, you have to use the premises for XYZ, well, that’s what you were buying, if you were some use that couldn’t use it for what was in bed baths, lease it, they didn’t have the catch all language that said for any retail purpose. Well, then that’s the tough part for you to buy that lease, you’re better off waiting for that lease to go back to the landlord and making a direct deal.

Iacono 22:49
I would hope you would know all that. On the front end if you were bidding, right. I’m sure all that documentation was

Ressa 22:55
there. Yeah, there’s a lot of stuff. And then.

Iacono 22:59
Yeah. Because restrictions are. Yeah, that would change the whole nature of the deal. Yeah, very, very interesting. What’s your prediction for the leases that they brought to auction? So they thought there was enough value to go that route? But they didn’t trade? Is there going to be in around two

Ressa 23:19
here? Yeah, I think route two is next week. Okay. Yeah,

Iacono 23:23
interesting. So give it another go for that subset. And then the ones that were not brought to auction, do we think that these will be brought at a later date? Or the terms are just too short or just doesn’t make

Ressa 23:32
sense? I’m not sure what the plan is for those. Okay. Yeah.

Iacono 23:37
Overall, very interesting experience and strategy

Ressa 23:40
experience. It was a cool experience to see how it was all going down.

Iacono 23:44
For sure. In person, do you think you’d go in person to another bankruptcy auction? If given the opportunity? Yeah,

Ressa 23:50
I think you have to be bidding, I don’t think they just let anyone in the room, at least in this one they didn’t. And then if they have the option to make it virtual or in person, unless there’s some unless you’re like, Alright, I’m gonna submit a bid for like 50 cents. And if they take it great, if not, I don’t care. If you’re like really planning on competitive bidding, I would recommend that you go there’s a lot to be seen in the room. And those who are virtual, didn’t get to see all that. So I think there’s probably opportunity from being physically present.

Iacono 24:28
I love when you told me there were teams for some of these large retailers with computers running, you know, their laptops with them running different models as the bids changed and kind of huddled together and sounds like a scene from a movie. So yeah, it was really cool. Alright, let’s move on to what’s happening in the DTC world direct to consumer. So there’s been just a few things we want to touch on one with the growth looks like and how physical retail is playing in, and then what segments of DTC have really surprised ized us and not been covered as much in the media for the pretty impressive growth. So I’ll kick it off with a stat that we both shared from KPMG, which estimates compound annual growth of 23%. From 2019 to 2023. In direct to consumer sales, so compound annual growth of 23%. That’s the phenomenal, right astronomical numbers of the success of DTC brands. So what does that mean for us in physical retail direct to consumer used to be very often right, just online only? That’s no longer the case. So how are you seeing the growth of DTC impact bricks and mortar?

Ressa 25:48
Yeah, I think, direct to consumer has significantly grown. And I think most of them reach a point where they say, oh, we need physical stores too. And we’ve seen that from so many. And we still continue to see that I think how people enter stores is different across the board, right? Like, some might have a storage store like dorma fi, some might have a pop up, some might be Warby and, you know, just open up normal physical stores. What I think is interesting with this explosion, to me, is we haven’t seen a lot of this, get into what I would consider the traditional open air suburban retail center, which is the majority of centers in America. And I think, given a change in the workplace, meaning there’s hybrid, and people are home more, and this move, where people have moved out of cities, in many places in America, I think you’re gonna start to see more and more like, you know, you know, some lifestyle brand in a traditional grocery anchored center. That hasn’t happened in scale yet. But stay tuned, I think that’s going to happen.

Iacono 27:05
It’d be fun to watch his trajectory from the store and store the pop up. Are these just almost feels like testing like dipping their toe in? Yeah, that’s how many of those in five years were like, Oh, of course, it’s an every, you know, it’s right next to the Starbucks and every suburban shopping center, like how is that not always been the case, right become so commonplace. So that’ll be a fun sort of growth pattern to watch. For there’s one one category, when we were catching up that you mentioned, which blew my mind. And I’m gonna let you cover it because you got it up. Go ahead. So

Ressa 27:39
the jewelry has just been fascinating. I had no idea there was so many new jewelers who were doing so well online, and then opening physical stores. And then, you know, the net new number of physical jewelry stores. It has is, you know, is 100. And what is it? Carly? I don’t have it for me, I

Iacono 28:04
think it was a net increase of 133, which was 70% increase 2019 to 2023.

Ressa 28:11
Yeah, which is just so you know, people want to feel good about themselves. They’re buying jewelry. And I think it’s a fascinating category that, you know, doesn’t get spoken about as much in retail because it’s usually smaller spaces specialty. But the fact that they there’s like just about every category that went online and tried to do DTC through online is now going into other avenues, which may be physical stores might be some wholesale might be store in store, I think it’s really, you know, made retail real estate stronger in the laws, created more opportunities for new tenants that were never there.

Iacono 28:53
And some of these numbers really are a surprise, the growth numbers, you think, oh, maybe there’s a local jeweler who opens a small store, but these are big brands that are betting heavily on bricks and mortar. And I think that’s really the takeaway. Everything from Tiffany’s, Kendra Scott Blue Nile, like a wide range of pretty significant tenants are saying, we’re changing our strategy and we need to be in these centers in some capacity. Yeah. Really, really interesting. Yeah, for sure. Last thing we’re going to touch on today is an update on store in store and we’ve kind of, you know, skirted around this already, but what are you seeing be really successful and where do you think we go from here in store to store in a store concept?

Ressa 29:38
I think there’s clearly some, you know, storage store is clearly here to stay. I think it’s an ancillary part of a lot of these retailers businesses, but it’s certainly super interesting. You know, the numbers Kohl’s is talking about which by the way, I just you know, Kohl’s what under label execution they’ve had right they announced this partnership with with Sephora in 2020. And they’ve rolled out 850. That execution is pretty fast because it’s in their stores. It’s disrupting their stores, and that the increase in sales they’ve had in the year over year growth in the amount of new customers they have. And the amount of new beauty segments that they’ve been, you know, able to get into the store has been really uncanny if you just go to Cole’s earnings, and it talks about all these new things that have happened because of this. And it’s been so strong that now Kohl’s is opening another couple 100 in stores that weren’t originally identified for Sephora. So I think that’s really interesting. For both concepts Sephora and Kohl’s.

Iacono 30:52
One thing I’d like to point out on that I think they did exceptionally well with the branding of Sephora. So I’ve seen store in store let’s say when Toys R Us opens up in Macy’s, I don’t think their in store presence is the same or anything close to what Kohl’s is executed. When you go to a Kohl’s with a Sephora now, it’s noted on the outside of the building, when you walk in, there’s a full build out almost an interior facade. I know that doesn’t make sense. But an interior build out that makes it feel like you’re walking into a Sephora, so they really put money into almost having a consistent Sephora experience that you forget you’re inside of another store. So how retailers rollout store and store and how much money they put into these build outs to affect the consumer experience, I think will make a big difference on the success of these programs.

Ressa 31:43
Yeah, the capex was no doubt I’m sure you can look it up in their earnings. But the catbacks just from the you know, the eye test is significant compared to some things that I’ve seen out there for sure. And I think, you know, if there’s a lack of space out there, you might continue to see some new store and store partnerships for people that you know really gained some market share that they might not otherwise get.

Iacono 32:09
Exactly. I did also see that Walmart was partnering with Claire’s to do store in store. I think they’ve got about 360 store in store locations. And I’ll be interested to see if it feels more like the Sephora Kohl’s build out or if it’s just a section that happens to have some Claire’s branded products. So yeah, that’s for sure. Yeah, exactly. All right. We’ve covered a lot of great stuff. I’m so glad we could do our summer retail recap today. To everyone listening. I hope you found this information valuable as always reach out to Chris Araya if you’d like to talk retail real estate. Chris amazing to see you and looking forward to next month.

Ressa 32:49
You too. Take care Carla.

Iacono 32:51
Thanks everyone. Have a great day.

Ressa 33:03
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