Local Real Estate To Help Determine Future of Stores

The Toys R Us in Wheaton has established itself as among the chain's better-performing stores over the past decade, according to local retail brokers.

But it is also slowly being surrounded by townhouses and condominiums that are selling for $300,000 and up. Nearby, a renovated Hecht's and a new Macy's are vying for the retail dollar.

As a new consortium of owners begins analyzing the future of the Toys R Us chain, the fate of individual outlets such as the one in Wheaton could hinge as much on surrounding development patterns as it does on each store's proficiency at selling toys.

"In Wheaton, they're getting a store that is surrounded by condos and a Macy's coming in at Wheaton Plaza across the street," said Gregory H. Leisch, chief executive of Delta Associates, a real estate research firm. "They'll likely tear down the store and put in something that's a higher and better use, like office, condos or some sort of mixed-use development."

Although the buyers have not said what their plans are for the approximately 900 Toys R Us stores they are buying across the country, including 18 in Maryland and 22 in Virginia, they will spend the next few months looking closely at the performance and locations of the toy stores, according to real estate brokers and retail analysts. Their analysis could result in a number of high-profile properties being converted into other types of retail stores, or being torn down and replaced with other types of development.

That Vornado Realty Trust is one of the new owners is key to understanding what is likely to happen next, local real estate brokers and analysts said. The firm is one of the country's largest owners of retail and office property and is the largest in the region, next to the General Services Administration. Its subsidiary, Charles E. Smith Commercial Realty, owns 66 office properties, totaling 14.2 million square feet in the District and Northern Virginia.

The company will offer particular expertise in marketing any properties that the new owners want to sell, or in arranging new uses for them. Toys R Us owns 444 of its U.S. stores and leases the rest, often under long-term, below-market arrangements that could be attractive to other tenants.

"Some of these stores sit on real estate that's too valuable to leave as a Toys R Us," said Thomas H. Maddux, president of KLNB Retail, a retail brokerage firm.

The two investment firms that joined Vornado in the $6.6 billion deal say they intend to maintain and build the toy chain's business. But for Vornado, "this is a real estate play," said Thomas R. Maskey Jr., a senior vice president at the Peterson Cos. in Fairfax, which owns offices and retail shops in the region, including the Fair Lakes Center, where Toys R Us has a store. "They want to buy real estate that's well located and figure out how to make it perform better, turn it around or sell it to somebody else," Maskey said.

Stores in the metropolitan area that are not considered strong performers could be closed and leased to other retailers that would fit into the space, such as Best Buy, or Bed, Bath & Beyond, retail brokers said. The new owners could also take stores that are in busy strip malls and divide the large floor plate into smaller storefronts for such retailers as Panera Bread.

"They'll look at stores that contribute to the bottom line and possibly keep those, and the ones that don't, they'll try to get rid of those and put something else in there," said Richard S. Lake, principal at Roadside Development, a retail developer based in the District.

The Toys R Us store in Vienna, for example, is well located -- less than a mile from Tysons Corner Center -- making it ripe for development into an office building, according to local retail brokers and developers. "It's a center that was developed in the '70s, and it should have been torn down already," Leisch said. The toy store in Baileys Crossroads, which sits in a strip of other big-box retailers, could be turned into a mixed-use project.

The store at Mid-Pike Plaza in Rockville is doing well and is one that the new owners are likely to keep, retail analysts and brokers said.

Toys R Us had a real estate strategy of looking for cheaper spots to lease or build that were close to major malls, according to Lawrence B. Hoffman, a principal at H&R Retail, a brokerage firm. "They would go on the ring road of a mall, like they did at Wheaton," Hoffman said. "Their way of doing real estate was they wanted to get close to the mall and feed on the traffic that went to it."

But as more retailers jockeyed for valuable land, Toys R Us changed its strategy, Hoffman said, and started to put its stores in strip malls that catered to big-box stores. In Columbia, for example, Toys R Us sits next to a Dick's Sporting Goods, Old Navy, Target and CompUSA.

Some of the Toys R Us stores developed in the 1970s and 1980s, retail experts said, received long-term leases at favorable rates -- often one-third of the going market price -- to come into shopping centers.

"If they have long-term leases in place that are below market, that allows them to control the real estate," said Don Briggs, vice president of development at Federal Realty Investment Trust, which owns the Mid-Pike Plaza where Toys R Us leases store space. "If they shut down a Toys R Us and sell the lease to someone else who brings in another tenant, that's where they'll make their value."