Discount chains Five Below and Dollar Tree are snapping up former Party City locations amid a tight market for brick-and-mortar retail space.
The party supply store auctioned off 250 locations this month as part of its ongoing bankruptcy process, and the dueling discount chains successfully bid on a combined 148 leases, according to CoStar. The rest of the leases went to off-price retailers such as Rack Room Shoes, Books-A-Million, and Burlington Stores, as well as specialty retailers such as Barnes & Noble and La-Z-Boy.
- The auction preceded the $20 million sale last week of Party City’s intellectual property and wholesale operations to New Amscan, an affiliate of Ad Populum, which sells pop culture goods and costumes globally.
While the Party City closures might seem like more evidence of the long-predicted but not quite realized “retail apocalypse,” the bidding process is conversely showing the strength of the sector.
“We’ve seen the uptick in closures and bankruptcies, but the flip side we’ve seen that really strong demand to backfill that space, at least where it’s well-located and not cannibalizing the existing footprint of retailers,” Brandon Svec, national director of US retail analytics at CoStar, told Retail Brew.
Keeping up with demand: The types of properties left behind by Party City are a hot commodity right now, Svec explained, in part because new construction of mid-sized big box stores ground to a halt in recent years.
“It’s a format that we’re not building any more of and that we haven’t built much of in the last 15 years,” he said. “That 10- to 15,000-square-foot junior anchor box within an open-air shopping center is the kind of market you want to be trying to backfill right now, because there is a decent amount of demand.”
- According to CoStar, the vacancy rate in US retail space is just 4.1%.
This is good news for landlords looking to fill vacancies. Bill Lenaz, retail leasing specialist at Jeffery Realty Inc., who previously represented a Party City location in central New Jersey, said he expects these properties to find tenants quickly due to tight supply: “There are just so few stores available. That’s why…when something goes out, it gets gobbled up in months.”
It also helps when a key retail sector is in expansion mode. Dollar Tree had opened 567 new stores as of Q3 and was on track to open 600–650 by the end of the fiscal year, while Five Below opened 82 locations in the quarter alone.
“In my opinion, the Party City locations are all good real estate,” Lenaz added. “I know every single other site they have in New Jersey, and with very few exceptions, they’re all in anchored, well-located shopping centers.”
Waiting for better opportunities: Tight supply, however, means landlords don’t have to jump at the first offer.
Brian Schuster, leasing agent at Ripco Real Estate who manages a Party City location in Long Island, said the landlord of the surrounding shopping center bid for the property in order to keep it away from a discounter such as Dollar Tree. “He just felt that he’d rather control it than have it end up in Dollar Tree’s hands,” he said. “We plan to attract a first-class retailer, which would be a better fit for the center.”
Bringing in Dollar Tree would have meant the landlord could collect rent immediately, he added. Now they’ll have to wait potentially months, but the goal was to secure a tenant that is the “best thing long-term for the asset,” Schuster said.
Svec said this scenario was consistent with a trend in retail in which “leverage has shifted from the retailer to the landlord.”
“Landlords are feeling much more confident about their ability to retake that space and lease it out at a much higher rent.”
This report was originally published by Retail Brew.