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  • Brad Thomas

Farewell Toys R Us, We Will Miss You

The latest headlines aren’t looking good for the toy industry, or the real estate industry for that matter.

Some companies (think Amazon, Walmart and Target, namely) are expected to benefit from the demise of Toys R Us, but it looks like a staple shop of my children's lives could soon be nothing but a fond memory. And that’s going to leave big gaps in the world of commercial real estate.

Toys R Us filed for bankruptcy protection last September, which initially rattled some feathers, but we all believed a restructuring was looming. At first, Toys R Us said it aimed to keep its store fleet as much of the same as possible.

Store closures weren’t the goal, management cooled shoppers’ worries. But then, early this year, Toys R Us announced it would move forward with closing roughly 180 stores of its 800 locations in the U.S. (Toys R Us also has big operations in the U.K., which it’s been winding down.)

With those 100-plus liquidation sales already kicking off, last week reports surfaced that Toys R Us was considering closing the remainder of its stores. The announcement could come as soon as Monday, according to sources who spoke with The Wall Street Journal.

There are obvious implications for the toy industry if this plays out as we might expect. Shares of Hasbro and Mattel, for example, tumbled last week on the news.

But I want to dive into the implications, which maybe aren’t quite as clear, for commercial real estate.

Toys R Us’ roughly 800 stores are a lot of big boxes, some under the Babies R Us name, some are outlets in malls, but many are located within strip centers.

In my hometown of Spartanburg, SC, a Toys R Us store anchors a shopping center alongside Ulta Beauty, Longhorn Steakhouse (owned by Darden) and Gap’s Old Navy—all quality tenants. And surprisingly, that Toys R Us store has always been a traffic driver in the city, luring in parents and their kids, especially on the weekends.

On my trips there, it’s always been chock full of inventory. If and when that store ever goes dark, a) the landlord is going to be looking for a new tenant, and fast! Meanwhile, b) parents and their kids will most likely resort to Target, which is right down the block.

Now, many of Toys R Us’ stores today are owned by a separate entity created by the company--Toys R Us Property Co., or Propco. Not exactly a REIT spinoff, but something like it. A handful of the retailer's locations are owned by REITs including Kimco, Brixmor, Weingarten and DDR. A smaller portion of stores are directly owned by the toy company.

We are still in "wait and see" mode as I write this article, with respect to how Toys R Us will proceed with liquidating its assets. But I can’t help but think through logical replacements for those 800 stores. Dick’s Sporting Goods? Not really growing. Lidl? Likely too big, plus their growth plans have stalled. H&M? Not so sure about a shopping center. Nordstrom Rack? Might not be in the right market.

Bottom line, I don’t think there are enough viable candidates to take these emptied spaces (again, if the stores do close). If you have the money to divide up the space and bring in a handful of smaller tenants, that’s great. But likely many landlords hadn’t baked this scenario into their 2018 capital allocations.

I think we’re going to see a lot of dark space on the real estate market, and for a long time, and my kids are really going to miss romping through the halls of the only “pure play” big box toy store in my hometown. I will miss Toys R Us and so will my kids, and each time I drive by the soon to vacant store I will remember the lyrics sung by Doris Day in Toyland,

“Toyland, toyland

Little girl and boy land

While you dwell within it

You are ever happy there

Childhood's joy land

Mystic merry toyland

Once you pass its borders

You can ne'er return again”


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