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Real Estate Experts Fear Flood of Vacant Stores

January 23, 2002|DARYL STRICKLAND | TIMES STAFF WRITER

If Kmart Corp. shutters hundreds of stores as many analysts expect, the nation's retail market could be flooded with vacant properties that will not be easily absorbed. Analysts said that probably will drive down retail rents in some areas and leave behind a trail of blight.

Analysts said Kmart, which filed for bankruptcy protection Tuesday, could close several hundred of its more than 2,100 stores as it tries to get back on its financial footing. Given the nation's economy and that many retailers besides Kmart had a poor holiday season, experts are expecting even more retail properties to be vacated.

Kmart's stores are big, generally 80,000 to 120,000 square feet in size. And although some abandoned stores may be picked up by Wal-Mart Stores Inc. and Target Corp., both of which are planning expansions, these competitors already have stores that overlap with Kmart in a number of key markets.

"There's already an excess supply of retail space and this will exacerbate problems to levels unseen before," said John Melaniphy III, vice president of Melaniphy & Associates Inc., a retail consulting firm in Chicago. If Kmart unloads hundreds of stores, he said, "it's going to be a huge blow to the real estate industry."

In Southern California, where the economy has been largely shielded from the worst effects of the downturn, several analysts agree that any Kmart sites that are vacated probably would be absorbed fairly quickly.

Some sites could be taken by national chains such as Kohl's Corp., which is looking to expand in the region. In addition, with buildable land in short supply throughout the Southland, some developers could be interested in converting sites into other uses, such as homes or warehouses.

Although Kmart has not announced any immediate plans for closing stores, analysts widely expect that older, struggling outlets will be the most likely candidates to be shut down. On Tuesday, the discounter said that by declaring bankruptcy, it no longer will be obligated to pay leases that have not expired on 350 stores that previously were closed or are being subleased to others.

That move is expected to save $250 million a year, Kmart said.

Kmart stores, which have been in Southern California for more than 30 years, tend to be in older retail districts along major streets.

The shuttered sites could be acquired by other chains, subdivided and leased to smaller retail tenants, or redeveloped into residential housing or warehouse space.

If sites are closed, "I don't expect those stores to remain vacant," said Richard Giss, a retail analyst at Deloitte & Touche in Los Angeles.

Besides the uncertainty surrounding the future of Kmart stores, public officials are wondering about the fate of a huge warehouse that Kmart had planned to open next month in Mira Loma.

The building, a former Toysrus.com distribution center, was expected to employ 400 to 500 people. But county officials have not heard whether Kmart's plans have changed since filing for bankruptcy protection, said Raymond Smith, a spokesman for Riverside County.

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