Thursday, May 10, 2007

Welcome to Small Box Leasing

A common phrase heard in the leasing business is a "big box." For those of you not in the business, a big box is like obscenity for the late Supreme Court Justice Potter Stewart: you know it when you see it. It is a large format retail outlet that varies in size depending on the industry. Wal-Mart? Big Box. Target? Yup. Borders or Barnes and Noble? You got the picture.

There's been a trend, as markets fractionalize and retailers try to penetrate other markets, to experiment with smaller concept stores. Wal-Mart, Lowe's, Home Depot and OfficeMax are among the companies trying smaller stores, as the Journal points out today. (sub required). But Best Buy and Circuit City are taking this one step further, opening outlets that are dramatically smaller. 45,000 sf stores are now 30,000 sf stores, and 34,000 sf stores are 20,000. And fewer products are being sold in these stores.

Why? Well, the Web is one big reason. Another is the decline in sales of CDs and music, which can take up a good chunk of floor space. Still another is more efficient distribution systems. And yet another is the ability to maintain decent sales per square foot that will justify opening in small or fractionalized markets. Assuming the trend continues, what it also means for investors is that they will have to chase more tenants in some developments to fill box space, and that they will not be able to expect as much cash from these projects.

But these stores can also fill in gaps and be boons. Case in point: our local Best Buy, which is in a closed Toys' R Us. It is not huge but it gets the job done, and I like going there. Of course, I should also tell you that the only electronics I bought there are (a) the PC on which I am typing and (b) my home theater speakers. All our other electronics were bought on the Internet, mainly because the higher-end products we sometimes seek just are not in stock and can be bought online for much less money and without sales tax.