Simon Property Group Inc. (SPG - Free Report) recently sued Starbucks Corporation (SBUX - Free Report) to refrain the latter from going in for its plan to close the Teavana stores in Simon’s malls. The move comes amid a wave of store closure announcements in recent times which have served a severe blow to the retail real estate market.
Simon’s lawsuit alleged that Starbucks’ 78 Teavana store closures in its malls would result in a breach of its lease obligations. Further, the company claimed that this store closure announcement by Starbucks has led to an adverse impact on the value of Simon’s properties. However, there were no specifications in the lawsuit about the amount of financial relief or damage sought by Simon, per the Indianapolis Business Journal news.
Notably, the Starbucks’ July announcement of store closures involves a shutter down of all 379 of its Teavana stores in the next year, with majority occurring by spring 2018. However, only two of the Teavana stores in Simon malls have leases slated for expiry before the spring of 2018, but the leases for the rest 76 stores run through January 2027.
Starbucks cited lackluster traffic in malls for the decision to close the stores. However, Simon alleged that this is just a lame excuse by Starbucks to refract the blame from itself. In fact, the mall landlord pointed out that the decision of store closures from several retailers like Sports Authority, Gap Inc. (GPS - Free Report) , Macy’s Inc. (M - Free Report) among others was an outcome of either bankruptcy or financial ruin.
But this is not the case with Starbucks, which has earned its reputation for being “one of the largest and most recognized companies in the world.” Rather, the Teavana store closure move came as the business failed to expand at Starbucks’ anticipated pace, according to Simon’s allegations.
Impact of Store Closures
As a matter of fact, mall traffic continues to suffer amid rapid shift in customers’ shopping preferences and patterns, with online purchases growing by leaps and bounds. These have made retailers reconsider their footprint and eventually opt for store closures in recent times.
Further, retailers unable to cope with competition have been filing bankruptcies. This comes as a pressing concern for retail REITs, as this trend has been considerably curtailing demand for the retail real estate space.
In fact, year to date, the REIT Retail industry has underperformed the broader market. This industry has declined 6.5% over this time frame, as against a 9.9% gain of the S&P 500.
Amid these, mall landlords have already decided to go to the mattresses. These companies are continuing to make concerted efforts to turn their boring retail hubs into swanky entertainment zones, digitizing their malls and turning into distribution hubs.
However, the choppy retail real estate market situation is also said to have led to tenants demanding substantial lease concessions, which the mall landlords are finding it unjustified. Moreover, significant store closures in the middle of the lease term not only hurt the mall landlord, but also the tenants occupying space in that mall because their shop visits also depend on the mix of specific type of retailers.
Currently, Simon Property carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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