5Qs for Inland’s Joe Cosenza on Bed Bath & Beyond

One of our favorite visits to make at the ICSC Las Vegas show is the Inland booth to talk to the company's vice chairman Joseph Cosenza. Joe and his founding partners are a classic American story. They were public school teachers in Chicago back in the Sixties who formed an investment club and got into real estate. Got into it real good. Over the past 50 years, Inland Real Estate Group has acquired and managed hundreds of millions of square feet of property all over this great land of ours. So when we sat down with Joe and he said he had something to say about the Bed Bath & Beyond bankruptcy, we listened. Now you can, too.

The big buzz at the show this year was all those Bed Bath & Beyond leases coming available. You have several Bed Baths in your centers. What’s your take?

I hear a lot of people saying that the Bed Bath & Beyond bankruptcy is not a scare. That’s bull. Of course it’s a scare. We felt the punches you can take in retail real estate in 2008. We felt the punches of 22 vacant Linens and Things, 26 Circuit Citys, 25 Mervyn’s, and 15 Borders.  Fortunately, our company was so big at the time and five of the REITs that exist now had not hit the stock market yet and we were able to absorb it and work it out over a two-year period. All the spaces got re-leased or sold off as standalones. It takes a lot of work, expertise, money, and time to accomplish this.

What are your chief concerns when a chain like Bed Bath & Beyond goes down?

Well, first of all, those are big spaces—25,000 to 30,000 sq. ft. How many other tenants are going to want a space that big? There are quite of few of them, yes. But what if they all already have spaces in centers down the road? And rents are way up now, by an average of about 70%. It may not be easy to fill that space. That’s why we jumped the gun and terminated two of the leases before bankruptcy.

I’m hearing from everybody that construction labor costs have gone through the roof, making buildouts very, very expensive.

Absolutely. We have four new tenants where the overall cost was $2.6 million to put them in. We’re a big company, but that’s a big number for anybody. What if you’re a smaller investor and you have a vacancy like that and can’t come up with that money? You can’t put the new tenant in because you’re tapped out and can’t wait for the return.

How long can that take?

In the case I just mentioned to you, it will be approximately two years. But for a job that expensive, three-and-a-half to five years is the norm for the payback. There are so many things you have to think about and worry about. You have to have a free hand to put anybody in the space. You could get lucky and get a Kohl’s or a grocery store—like those in Mervyn’s-- that’s used to filling big spaces and have patience.

For now, it looks like the Fed is in a holding pattern on the interest rate, so are we really in the same economic situation as we were during the Great Recession?

Parts of the bad economy are good for us. The same kind of bad economy was going on then. Nobody was building new space then, and nobody is building new space now, so space is hard for some retailers to find. I may find many tenants who want to be in the 25,000 sq. ft. space, but only want 10,000 sq. ft. What’s my cost to renovate the space? Do they need double exits? New bathrooms? New HVAC and walls?  It is very costly.

So don’t tell me that vacant Bed Baths are not a scare. I get scared any time we have a vacancy.