Correction to This Article
An earlier version of this story incorrectly said that Federal Realty Investment Trust is the landlord for the Borders at White Flint Mall. It is the landlord for other Borders locations in the area but not that one. This version has been corrected.

Borders bankruptcy spells problems for Washington area businesses

By Danielle Douglas
Capital Business Staff Writer
Monday, February 21, 2011

Local retail landlords are set to take a bruising from the closure of several Borders bookstores, which will deny them millions of dollars in rent and put tens of thousands of square feet on the market.

In its filing for Chapter 11 bankruptcy reorganization last week, Ann Arbor, Mich.-based Borders Group said it would shutter 200 locations, eight of which are in the Washington area: Friendship Heights, Kensington, downtown Washington, Tysons Corner, Bowie, Largo, Winchester and Stafford.

The locations, representing nearly 200,000 square feet of retail space, are expected to go dark by the end of April. Borders, which has about $1 billion tied up in lease obligations, declined to comment on whether it is considering further closings. The company has 31 stores remaining in the District, Maryland and Virginia.

Some landlords are already dealing with the closures, including Federal Realty Investment Trust in Rockville, which leases space to four Borders superstores across the country, including the one at 5333 Wisconsin Ave. in Friendship Heights.

Borders has stopped paying the company rent, which amounts to $3 million a year, said Donald Wood, president and chief executive of Federal Realty, in a recent earnings call.

"Certainly, that income stream is at risk in the short run," he said during the call. "You can understand why we'd be anxious to work through these deals as quickly as possible, so that we can release those prime locations."

Many retail experts expect that most of the local sites Borders plans to vacate will be snapped up quickly.

"These store closings in the D.C. area will have much less of an impact than they would have had 18 months ago," said Christopher Macke, senior real estate strategist at CoStar Group. "Certainly D.C. is going to weather this much better than the rest of the country."

Demand for large retail space inside the Beltway has been fairly strong, especially as development has remained restrained, said Dimitri Georgelakos of KLNB Retail, the leasing agent for the Tysons Corner bookstore.

"By virtue of being in Tysons Corner, where there is not a whole lot of availability for spaces of that size, with frontage that sits out on Route 7, we're getting a lot of significant interest," Georgelakos said, adding that he was not at liberty to name the suitors.

Not every location may have as much luck as Tysons Corner. Borders in Largo is located in the Boulevard at the Capital Centre, a development that has lost several national retailers in the past few years. That could be a hard sell to retailers, for whom a healthy mix of tenants is paramount.

Macke says that many of the Borders set to close across the country probably shouldn't have opened in the first place. A Borders adviser said in a court filing that the stores being shuttered cost the company $2 million a week in losses.

A series of missteps brought Borders to its knees, analysts say. The company, which has $1.29 billion worth of liabilities, embarked on a pricey overseas expansion that grew its debt. Instead of taking a cue from competitor Barnes & Noble, which jumped into the lucrative e-reader business with the Nook, Borders was slow to even carry the products.

Borders' bankruptcy has sent ripples throughout the business community, with Arlington-based Rosetta Stone citing the turn of events as a factor in its decision to lower its future revenue projections. The bookstore is one of the language instruction software company's global retail partners. Rosetta Stone's stock fell 17 percent Friday on the news.

Others could benefit. As the company scales back, Barnes & Noble could solidify its dominance in the bricks-and-mortar bookstore segment, which could prove troubling for landlords. Previous exits by troubled businesses have allowed those still standing to demand better terms.

"Just like Bed, Bath and Beyond without [Linens 'N Things] and just like Best Buy without Circuit City, Barnes without Borders is in a better negotiating position," Wood said. "We've got work to do to make sure that we are protecting our properties there. I don't know how that will turn out, we'll see over the next couple of years."

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