Landlords may face big holes: If groceries close, centers would suffer

December 5, 2005

Marsh Supermarkets Inc. serves as an anchor tenant for dozens of central Indiana shopping centers. So if the company or a buyer ends up closing stores, centers across the region could be left with gaping holes.

Not only can large vacant spaces in shopping centers make them look blighted. They also reduce customer counts at smaller retailers that feed off grocery store traffic, retail experts say.

"People go to the grocery store once or twice or three times in a given week. No matter what happens to the economy, you still have to eat," said Scot Courtney, director of retail services for locally based Grubb & Ellis/Harding Dahm & Co.

How the future will unfold for Marsh is far from certain. The company announced Nov. 29 that it had hired Merrill Lynch to evaluate options, including a sale. Analysts say a buyer or buyers might want only certain locations, or might acquire the whole chain but later close stores.

And Marsh itself might shutter locations. In a filing with the Securities and Exchange Commission last week, Marsh said it "intends to limit near-term capital expenditures and to evaluate underperforming stores and other assets for possible disposal or closure."

Marsh operates 118 groceries, primarily under the Marsh, LoBill and O'Malia names. If stores close, shopping center owners won't necessarily bear the burden of filling vacant spaces. Marsh owns 29 percent of its grocery locations. In addition, to generate cash in recent years, it's sold and leased back many of its stores, sometimes leaving a location with different ownership than the rest of the center.

Even if a shopping center owner doesn't own the space, it can feel the blow, retail experts say. Filling vacant grocery spaces can take months or years. In the meantime, other tenants in the center may close or flee to higher-traffic areas.

"Grocery stores in general are a daily draw of people. One leaving would absolutely have an effect on the overall center," said Keith Fried, principal of locally based PK Partners LLC, which has developed several local shopping centers.

PK owns Clearwater Springs, a 248,000-square-foot shopping center at 82nd Street and Allisonville Road anchored by Marsh, Petsmart and Ethan Allen.

Several centers were left hurting when Cub Foods, a big-box grocer owned by Minnesota-based Supervalu Inc., closed all 11 of its Indiana stores in 2001. Some shopping centers anchored by Cub turned into ghost towns almost overnight, with other retailers closing or moving.

In Cub's case, "some stores sold in six months and some took ... years," said Bryan Chandler, principal of locally based Eclipse Real Estate. Chandler brokered deals for several Cub sites. He said stores that sold fetched from $900,000 to $5 million. New users ranged from other retailers to schools.

As was the case with Cub, good locations will sell quickly while less desirable sites might languish, Chandler said. He said that also would be the case for Marsh's Village Pantry convenience-store chain, which has 160 locations.

Marsh three years ago shuttered at least 30 Village Pantries, as part of a plan to focus on stronger-performing stores in newer neighborhoods. Some of those closed locations still sit vacant.

In general, Marsh has better grocery locations than did Cub, Courtney said. Cub's business model was to lure shoppers from a wide area with low prices, and many stores were in areas targeting consumers with lower incomes. Marsh, on the other hand, has many more stores in prime locations in high-income neighborhoods.
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