This story appears in the June 14, 2015 issue of Forbes. Subscribe
On a freezing, snow-covered Friday in early March, Andy Graiser and Emilio Amendola are standing in the parking lot of a suburban Long Island strip mall, ruminating on the evidence of drastic changes to the retail sector over the last 25 years.
One side of the strip houses a 10,000-square-foot Ulta Beauty next to Tilly's, DressBarn and Modell's. In 2012, when the pair started workout firm A&G Realty Partners, based in Melville, N.Y., that same space was almost entirely occupied by a Barnes & Noble. Going back further, a Tower Records and a Pergament paint store.
"From what it looked like before to what it looks like now, you never would have expected this," Amendola says of the mix of stores and restaurants that now make up the strip mall. Left unsaid and largely unseen is the fact that he and Graiser have played a role in driving that transformation by helping retailers extricate themselves from underperforming stores, negotiate rent reductions and optimize their real estate assets.
In today's ultracompetitive climate, retailers are finding themselves with limited options for expansion. Industrywide, net new-store growth is virtually nonexistent. Consider that U.S. shopping center space grew by an annual average of 169 million square feet from 2000 through 2008. For the last five years the pace has slowed to less than 50 million square feet per year.
Retailing is facing an existential crisis centered on its so-called footprint. Many blame the economic fallout from the financial crisis and recession, but the real culprits are digital and mobile alternatives from the likes of
Over the last two decades the pair have renegotiated and mitigated more than $6 billion in leases and worked on nearly 30,000 properties, mostly for onetime retailing greats like CompUSA, Blockbuster and Borders. A&G typically charges from 3% to 10% of gross proceeds on leases or properties sales. The recent sale of a distribution center for bankrupt retailer Delia's for $4 million, for example, netted A&G an estimated commission of $120,000. Its work with Borders brought in more than $1 million.
Long Island native Graiser is the idea man, opining on the industry's future and how lack of new development and concern for liquidity has prompted retailers to make acquiring leases an effective growth strategy. Amendola, a Bronx-raised son of a barber, is the numbers man.
RadioShack is a client. When its efforts to avoid Chapter 11 failed, A&G sold dozens of leases, many to GameStop, before the filing.
Amendola and Graiser started working together in the early 1990s, managing the real estate portfolio of New York's Dabah family, which controlled jeansmaker Gitano Group and retail chain the Children's Place. In 1992 the 170-store Children's Place was lurching toward bankruptcy after losing as much as $69 million in one year, but the team was able to settle with landlords for 35 cents on the dollar, avoiding a Chapter 11 filing.
Amendola, Graiser and a third partner then struck out on their own under a new banner at DJM Realty, specializing in distressed situations. A key assignment came in 1995 when Fashion Bug, a subsidiary of Charming Shoppes, hired DJM to close 290 stores and try to renegotiate rents on the rest of its 1,400-store chain. The mandate was seen as a no-win proposition.
"They already had bankruptcy counsel ready to go," Graiser recalls. Because of its puny size and short track record, DJM partnered with the larger Boston-based liquidator, Gordon Brothers.
"They had all kinds of systems and staff, and we were there with our pencils and legal pads," Amendola recalls. DJM ran circles around its larger teammate. "Fashion Bug was the deal that put us on the map," Graiser says.
It also opened the eyes of Gordon Brothers, which acquired DJM in 1998. A deal with Toys "R" Us showcased DJM's workout creativity. In 2003 the chain was closing Kids "R" Us and trying to get out of other locations. Major REITs wanted to buy their leases for pennies.
"They were always the first tenant in a shopping center, so they had cheap rents and long-term deals that lasted forever," Amendola explains. "They had every right a tenant could want; the landlords would have loved to get those leases back." When he and Graiser saw the landlords' paltry offer--about $60 million for the 127 stores--they phoned Toys "R" Us management.
"They gave us 120 days," Graiser recalls. So for three days the duo took a hotel suite during a shopping-center convention in New York.
"We had a different retailer coming in every half hour," Amendola says, "and we made sure that when
Office Depot wound up offering $200 million for all 127 leases in one neat transaction. The deal uncovered Toys "R" Us' hidden real estate value. Then in 2005 KKR, Bain and
Despite successes like Toys "R" Us, Amendola and Graiser thought working under liquidator Gordon Brothers was less than ideal, because the stigma made healthy clients shy away. The two quit and launched A&G Realty in 2012.
Today, Graiser says, A&G is doing just as much with healthy retailers as distressed ones. It has been helping furniture chain La-Z-Boy expand,
Back in the parking lot in Huntington, N.Y. Graiser points to the nearby Walt Whitman Shops, a traditional mall turned "inside out" by owner
One by-product of digital growth is a shrinking of retailer footprints. Big boxes and vast, time-sucking indoor malls are out, while lower-cost strip malls that offer everything from urgent care to organic grocers are in.
Graiser also notes that digital disruptors like Amazon and eyeglass merchant Warby Parker may move toward strategic physical outposts. "Millennial customers shop very differently, and retailers have to learn from it," says analyst Dana Telsey. She points to
Telsey argues that technology rivals real estate as firms try to stay ahead of Millennial trends. "It has to be a regular part of how retailers use capital," says Telsey, citing the latest twentysomething-inspired shift. "There's a reason restaurants, gyms and hair salons are growing," she says. Whether it's a GameStop or a Drybar or a
For Graiser's take on some of the country's beset-known retailers, and stock recommendations from Telsey Advisory Group, see the table below: