Bed Bath & Beyond’s decline breeds opportunity for Michigan retail centers

• As Bed Bath & Beyond eyes filing for bankruptcy protection, the fate of its 1,000 U.S. stores is unknown
• In Michigan, about 20 stores remain open
• If they close, other retailers are in line to fill the big-box retailer space, according to one Michigan developer

Investors are nervously watching Bed Bath & Beyond as the value of the home product chain — which had about 1,000 stores and 32,000 employees across the U.S. a year ago — has plummeted 83 percent since March.

The company is looking for a buyer and a lender as it careens toward possible bankruptcy this winter. Its stock now trades at $2.52 a share.

The potential bankruptcy raises questions about the chain’s last 20 stores in Michigan — and what will happen to the large outdoor shopping centers that are home to them if Bed Bath & Beyond liquidates. Among earlier examples that sent ripple effects across U.S. retail properties was the closing of Borders Inc. in 2011 and the downsizing of Toys R Us before its 2018 bankruptcy.

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But at least one important Michigan developer contends that the demise of Bed Bath & Beyond, if it happens, won’t necessarily spell catastrophe for surrounding businesses. Indeed, vacancies at large outdoor “power centers” — outdoor shopping centers with several big-box retailers along with smaller stores and restaurants — can often lead to upgrades.

“We think when a store like Bed Bath & Beyond goes out, it breeds opportunity,” said Chris Brochert, managing partner at Lormax Stern of Bloomfield Hills, which owns or manages 50 commercial properties in the U.S., including Macomb Mall, Frandor Mall in Lansing, Green Oak Village Place near Brighton and The Village at Knapp’s Crossing, north of Grand Rapids.

Bridge Business Editor Paula Gardner recently talked with Brochert about what a BB&B bankruptcy could mean for Michigan business, along with other changes affecting the state’s retail landscape.

Two of the closing Bed Bath & Beyond stores are on your properties, in Auburn Hills and Northville Township. But it sounds like you’re not worried about long-term vacancy.

Well, they did not exercise their last option (to renew the lease) on one of the two. We've already re-leased (half) of the space to someone else. And they haven't even vacated the space.

… So far (Bed Bath and Beyond hasn’t) shown any signs of anything, but everybody knows … the writing's on the wall. These guys probably aren't going to make it in their current configuration.

I’m surprised to hear you found another tenant so quickly. 

They took a little bit more than half the space, and then I have like five other people that want the other half. 

It sounds like there are retailers still willing to expand and commit to physical space in Michigan?

There are a lot of retailers out there looking for space. And frankly, our portfolio at this time is pretty well-leased. The only spaces that I really have available for larger users are stuff like the Bed Bath & Beyond. 

Now that Party City has (filed) for bankruptcy, and if they go out, there's going to be a whole slew of 12,000 to 20,000 square foot store spaces available. And there are a lot of tenants looking for homes in that size space; it’s difficult to find right now because it just isn't available. 

I think that might surprise some people. We’ve been hearing about malls on the decline and repurposing retail space for years. And how shopping changed during the pandemic. Are you surprised?

Prices of construction have gone up steadily since (the end of the Great Recession).  And in the last five to seven years, really dramatically. The cost of construction has gone up so high that a lot of these retailers just simply cannot afford to pay what is required in rent to justify the cost of the construction. 

That's a national situation. And basically, the new development business has come to a screeching halt. Very few power center projects are being built.

So for us, when we see a bankruptcy like this taking place … it causes other retailers to take notice — existing retailers in the market or retailers that are thinking about entering the market. They say, ‘Oh, I can get into the metropolitan Detroit area.’ Then they're not going to open one store, they want to open up more because they can amortize the cost of advertising overall.

Over the years, I remember being nervous about vacant Borders and Toys R Us stores when those chains shuttered across the country. 

Most of those stores are already re-leased to other users now. For instance, we bought out of bankruptcy court two locations that were former Toys R Us stores, and both of them have been leased out since as soon as we bought them. 

As you're describing it, it sounds like the average consumer, who already is not shopping at Bed, Bath & Beyond, will just keep buying their bedding from other sources, and in the meantime, they’ll still see retail centers in their community filled with stores, at least in the top markets.

The tenants in our shopping centers are generally TJ Maxx, an Old Navy and Ulta, Five Below. A number of service-oriented users like spas and nail salons and chiropractic clinics;  fast-casual restaurants, pet stores and all these kinds of users. Those stores are frequently visited. It's in our DNA to want to go out shopping.

So we should distinguish between indoor malls and large — or “power” — shopping centers.

The difference between (power centers) and the regional mall situation is that the regional mall has not been decimated unnecessarily by the internet. I think it's been decimated by the department stores becoming really functionally obsolete. Over the years everybody's taken a little bite out of the department store.

You can see Macy's has done an excellent job repositioning themselves with off-mall locations, smaller units and you know, it's a whole new ballgame for the department stores. You have high-end locations, obviously, where people want to go, like Neiman Marcus or Nordstroms, etc. 

Look what happened to JC Penney. They're surviving, but their stores are so much smaller than when they were building in all the malls, and most of their locations now are really awful locations. 

I was stunned recently by the reports that malls were ‘coming back.’ Some teens that I know are asking to go to malls. My college-age kids didn’t.

A lot of societal behaviors have changed over the years. There's not a lot of time to be spending hours and hours roaming around inside of a mall. I think people want to get in and get out; they don't want to linger. 

It’s a whole other story that the stores doing very well are in these outlet malls. Because everybody's looking for a bargain. And there's really no major department stores attached to any of those in malls. 

We met in 2016 when I did a story on Macomb Mall’s rebirth. How is it doing?

Dynamite. You know, we're now at almost 100 percent (occupancy). There's an example of the Babies R Us store, within weeks of it going out and us getting the space back, we had re-leased it. We leased it to Michael’s and Five Below after splitting the building up. They’re doing great. 

There are a lot of areas around here where you have stores that are in good locations but their concept has become functionally obsolete or economically obsolete.

Tell me a little about Frandor Mall in Lansing. That’s a survivor from a different age. Someone told me recently that its rebound is tremendous.

We are almost 100 percent leased there right now. We just made a deal to extend our Kroger lease for an extended period of time. I have one space that's 3,000 square feet that's actually leased to a temporary tenant, but that's the only space I really have available in the whole 500,000 square foot shopping center. 

When we got involved with the property 25 years ago, it was a hodgepodge of local retailers and no dominant retail. Over time, we've had an opportunity to modernize with even better retail every single time.

Broadly speaking right now, what are the benefits and the pressures today for a shopping center owner?

Well, I don't know about anybody else's issues. Our portfolio is extremely strong because we have a really low debt-to-loan ratio. The properties we built in the 1990s, you can’t just replace it. And every single time that we go to refinance the property, we don't take out extra money. We just take out what we need to pay off the old debt and then it gets lower and lower and lower. 

How do national retailers view Michigan right now?

Some retail chains have some of their best stores in the country here in the state of Michigan. I think it's a pretty stable area. It's consistent.