Bed Bath & Beyond's Bankruptcy Could Hurt Landlords After All

There’s been an ongoing assumption throughout the trials and pain of Bed Bath & Beyond that landlords could look beyond a coming bankruptcy to new tenants lining up for the space.

That story line started in January as the Wall Street Journal reported that “landlords who own big-box space occupied by the troubled home-goods retailer are more confident about finding new tenants than they would have been in years past, according to property owners and retail analysts.” Names like Sephora, Trader Joe’s, Dick’s Sporting Goods Inc., T.J. Maxx, Ross Stores Inc., and HomeGoods came up.

“Already, chains including TJ Maxx, HomeGoods and Ross have scooped up the vacant stores,” wrote CNN in March. “Burlington, Five Below, Nordstrom Rack and budget gym Planet Fitness may also fill up the spaces, say retail landlords and real estate analysts.”

But will it be all that easy? Granted that retail space has been tight. Final demand construction for private capital investment, according to government PPI reports, is up 45.6% from March 2019 to March 2023. Add in the highest interest rate environment the industry has seen in many years and building new space is expensive.

Taking over an emptied storefront should be less costly, especially if there’s a perception that a landlord can’t afford to keep it empty for long.

“The loss of Bed Bath & Beyond may materially impair cash flow for some properties and result in some loans defaulting,” wrote Trepp in an analysis, which did note that other retailers were picking up on many of the vacancies. “Due to low levels of retail development in recent years, Bed Bath & Beyond’s bankruptcy means a greater supply of space for retailers looking for expansion opportunities.”

But many isn’t all, by any means, and a space isn’t taken until someone signs the lease and starts paying. Typically, bigger retail spaces have been customized to a given operation and may require significant changes. A cooling economy and concerns about a recession could cast more of a chill than some observers had thought.

“News of Bed Bath & Beyond’s bankruptcy filing could signal a rough road ahead for big-box retailers not already targeted to value-conscious consumers, as consumers have slowed their discretionary spending in recent quarters,” as Trepp wrote. “Furthermore, some retailers like Walmart are pushing aggressively toward automation; and social media channels are claiming more of the shopping landscape. The combination of these elements, along with inflation and tightened financial conditions, creates continued challenges for retailers.”

The result has been big-box retailers preparing for “economic uncertainty amid an already-shifting consumer environment.”

Concern is already reflected in the Bureau of Labor Statistic’s Job Openings and Labor Turnover Summary report for March released on Tuesday this week. Overall, there were 12 million job openings in March 2022. This last March, there were 9.6 million. Job openings for retail trade slowed from 1,336,000 in March 2022 to 717,000 in March 2023.

And while Cushman & Wakefield reported a “healthy” retail start to 2023, with tight vacancy rates and strong tenant demand, they also wrote, “We are expecting demand to pull back over the course of 2023—both organically and because of increased store closures—as retailers grapple with a potential recession, tighter financial conditions and the phasing out of post-pandemic consumer spending drivers.”

“Although the retail sector is on sound footing as we head into a more difficult economic environment, broadly weaker job growth—or even declines—will have an impact on consumer spending,” they continued.