Circuit City Bankruptcy Sends Landlords Reeling

Media Buyer Planner ^ | November 12, 2008

[2ndDivisionVet]

Circuit City’s bankruptcy filing is causing concern among U.S. shopping center and mall property owners as they face the prospect of every Circuit City store turning into vacant space, Reuters reports (via Retailer Daily).

The No. 2 consumer electronic retailer will continue to operate through the rest of the year, thanks to $1.1 billion of debtor-in-possession financing from existing lenders, led by Bank of America. However, that financing must be brought down to $900 million by Dec. 29, and Circuit City will be forced to use holidays sales proceeds to repay other outstanding loans.

The liquidity will get them through the retail season, but it “remains to be seen” if they will get through the next year, retired bankruptcy judge Frank Conrad was reported as saying.

If Circuit City does end up closing the 566 stores that remain (after the 155-store cut announced last week), its retail landlords will suffer, Bloomberg writes. They first lose rental revenue because under bankruptcy protection a retailer can break a lease with court consent, unlike a regular store closing where rent is still due. Then the landlord is forced to find replacement tenants, which can often be a costly process.

Analysts have suggested that landlords try to renegotiate leases with Circuit City so as not to lose their business completely, but often that ability is blocked by constraints under their own lender agreements or by the new owner of a sold-off “problem” mortgage.

The market reacted harshly to the news: Shares of Developers Diversified Realty, which has 50 Circuit City stores and derives 1.7% of its annual revenue from them, fell 24.6% on Monday. Real estate investment trusts (REIT) Kimco Realty and General Growth Properties also declined 9.6% and 34% respectively. (General Growth dropped another 68% in Tuesday trading.) Simon Property Group and Vornado Realty Corp are among the other REITs that lost value.

“Traffic is down in malls throughout the United States and as a result, the landlords, depending upon how leveraged they are, may have to file bankruptcy themselves,” concluded Conrad.

Circuit City stores leasesBefore Circuit City filed for Chapter 11, retailers had announced about 6,000 store closings so far this year. According to its latest yearly report, most of Circuit City’s leases were set to expire between 2014 and 2023. The chain owns almost none of its stores.

[Some Fat Guy in L.A.]

Circuit City used to be a good place to shop, because they had experienced sales people that could answer technical questions and that cared about your return business, so they were eager to help you. This is no longer the case. My local Best Buy has the usual teenage lobotomies working there that couldn't find their tails with both hands, much less help their customers - but CC is now no better and more expensive, so why go there?

My area has a brand-new CC building, ready to open, that now will not open. Another formerly decent company ruined by stupid management.

[Glenn]

I’m glad they declared sooner rather than later. The Sony 40” XBR 6 was on my shopping list this year. I am the last kid on the block to get HD and replace my 18 year old Sony big tube. I can wait another year or two. Buying one in this market means a large risk of problems.

[4FreeSpeach]

“I had to leave the store since the rock music they were playing was turned up to deafening volume, and it was impossible to think straight.”

I felt the same way and stopped shopping there several years ago because of this. I hope that if someone ever does a case study on Circuit City for the Harvard Business review or similar, they pick up on how much simple things like 110db of noise from multiple sources in a store can VERY negatively impact the buying experience!

[Extremely Extreme Extremist]

Here in Green Bay, guess what our stupid Circuit City did. They moved from a facility within the city to the suburb (Ashwaubenon) that has all the shopping center and stores. They just did this six months ago and now they’re going to close that new store too! Two friggin’ eyesores, can you believe it?

[Alex Murphy]

A new Circuit City store opened a few months ago near me. I drive by it every afternoon on the way home from work, and there are rarely more than 10 cars in the parking lot out front. Those have to belong to the store employees, I imagine.

Ditto here, except the one I drive by have been open for three or four years now. Their parking lot has never had ten cars in it.

[mlocher]

How about “Short Circuit”?

LOL!!!!!!!!

[ilgipper]

Don’t take the failure of two poorly run companies as indications of trouble. CC has definitely been doomed for a long time, they just had enough in the bank to delay it until now.

You are correct, as both have had major problems. The weakest are the first to go. Same with the restaurant business. The ones already teetering on the edge of closing are now gone. Part of this is the natural business cycle. I am an optimist but is seems probable that it will get much worse and eat into other companies that were doing fine a year ago.

[BradyLS]

It must take a lot of discipline at the top to break or stave off the cycle.

I would think that executives would “get it” after watching how their predecessors failed at the same game. Maybe the smart ones leave or retire early and rest are left to manage the slide.

[Poser]

“I would think that executives would “get it” after watching how their predecessors failed at the same game.”

I think it’s a span of control thing. At some point the business gets so big that the CEO can’t keep the quality up. I don’t think they can resist growing. Making billions for a few years versus making millions for the long-term is a tough choice.

[B4Ranch]

We can blame a lot of things on Obama but this financial collapse isn’t one of them.

I have no idea what Obama’s plans for this mess are but I have absolutely zero faith that Juan McCain would have had a better idea. I don’t get impressed by Communists or Socialists. They are both growing on the same tree and the flavor isn’t that much different.

[dilvish]

Can’t really count restaurants, that’s a business that always seems to be teetering on the edge (80% of restaurants go bust in their first year regardless of the economy).

The other side to think about is that as businesses fail that’s more for the survivors, capitalism is very cannibalistic by nature. People that were going to buy joysticks at CC aren’t going to not buy joysticks because CC is gone, they’ll go buy them from somewhere else. That income that wasn’t enough to keep CC profitable goes to improve the books somewhere else.

Don’t get me wrong, these are ugly economic times and the bottom could fall out. But as it sits right now really this is a repeat of the 2000/2001 downturn, a little uglier because the financial sector is so deeply involved, but it currently is just some rough waters knocking down unsound boats. It ain’t the Carter collapse and it sure isn’t the Great Depression. And in some ways it’s important we not talk ourselves into it being one of those. Consumer spending is a big part of the economy and if we all freak out and stop spending we can put ourselves in a Carter collapse real quick.