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Blockbuster’s Ripple Effect

Like defunct Tower Records, Wherehouse Entertainment, and Circuit City which left vacant large retail spaces dotting the San Fernando Valley, Blockbuster’s bankruptcy could potentially result in a massive amount of space hitting the real estate market all at once. Once the top dog of video rentals, the company has already announced the closure of hundreds of stores nationwide, as part of a restructuring process that aims to help the company emerge better positioned to tackle competitors like Netflix. At its peak, Blockbuster counted 9,094 stores worldwide and recorded $5.9 billion in revenue. So far, Blockbuster has told landlords in places like Agoura Hills and Westlake Village that they plan to keep store locations there open. However, leasing agents, brokers and tenants remain skeptical. “Everybody predicts Blockbuster will be giving most of those stores back, Blockbuster is going the way of Tower Records and Wherehouse Entertainment,” said Michael Schiff, principal with commercial real estate firm NAI Capital. Schiff represents the landlord, Regency Centers, LP, in shopping centers in Westlake Village and Agoura Hills that lease space to Blockbuster. “Blockbuster has already told the landlord they plan to keep those locations because they are profitable,” he said. Aaron Keswick, a leasing Agent with Regency Centers, said Blockbuster is a tenant in approximately 60 of the 400 shopping centers they represent nationwide. So far most of their locations in the Los Angeles area are slated to remain open, Keswick said. “They’re going to take it case by case, but there’s already interest from tenants in some of the locations,” he said. “Several tenants have been tracking these spaces for the past two years as Blockbuster’s bankruptcy seemed inevitable.” Most if not all of the local Blockbuster locations are prime retail spaces with high visibility located on anchored shopping centers, which are coveted by many businesses. “Blockbuster did one thing right and that was picking prime retail locations,” Schiff said. Schiff has already received multiple offers and has been approached by tenants interested in the two spaces occupied by Blockbuster that he represents, both which have said will not shut down. One offer came from a bank, another from a local beauty supply store. Nonetheless, Schiff believes it would not be as easy as it seems to fill those empty spaces should they become vacant. “The challenge is the size,” he said. “Most Blockbusters spaces are between 4,000 and 5,000 square feet and there’s not that many tenants that size other than banks and financial institutions.” Schiff currently is listing two spaces in the 4-6,000 square foot range left vacant by Hollywood Video that are leasing at a rate of $2.75/ square feet a month, which have been on the market for six months. This is a long time by his account. One of these locations is in a shopping center occupied by Bank of America and although other banks may be interested in the space, he said, BofA has the exclusive right to be the only bank there. It’s standard to include clauses in leases that restrict the number of similar businesses that can occupy one shopping center, he explained. These clauses can make it significantly harder to fill the space. One way to get around this challenge is to subdivide the space for smaller tenants, which could become the trend if many of these Blockbuster locations hit the market. Todd Nathanson of illi Commercial Real Estate, who recently renewed the lease on a Blockbuster in a Sherman Oaks shopping center, said Blockbuster is taking a look at underperforming stores and in many cases is asking for lease reductions from their landlord. Nathanson said that specific Blockbuster was originally scheduled to close, but the company made the determination to keep it open after sitting down with the landlord and renegotiating their lease terms. For landlords such as Regency Centers, LP, the threat of multiple Blockbuster closures does not represent a significant negative impact, and in certain instances there may even be an upside according to Keswick. In only a few instances is Blockbuster paying above market rates on their leases, he said. “For the most part they are older leases valued below market, so there is potential for an upside,” he said. Blockbuster filed for Chapter 11 bankruptcy and announced the first round of store closures last month. The company is currently seeking approval from the U.S. Bankruptcy Court in Manhattan to hire executive search firm Korn/Ferry International to identify CEO candidates, an effort to replace James Keyes, who has been CEO since July 2007. Under the proposed bankruptcy restructuring plan billionaire Carl Icahn and three hedge funds that hold the company’s debt would have a controlling stake. Icahn is currently battling for control over the Lion’s Gate Entertainment Corp film studio. New Entertainment Deals A reality television production company found its new home in North Hollywood recently, with the purchase of a 12,000 square foot industrial building at 5219 Craner Ave. The buyer, Fly on the Wall Productions, producer of such reality shows as the Big Brother series on CBS, plans to convert the property into a state of the art creative production facility. “The producers selected this location due to the excellent proximity to the studios and the potential for creative renovation” said Roger Beck, Senior Vice president of Grubb and Ellis. Beck and partner Gelena Skya, senior associate, represented the production company in the site search and acquisition of the facility. “This property and location provides Fly on the Wall a great site for its headquarters for a variety of productions as well as a partnering facility for edit/production space” he said. The planning and design process is already in progress and the new facility will be occupied by the beginning of next year. Beck and Skya also represented The American Humane Association, Film and TV unit, in their lease of an 8,500 square foot freestanding building located at 11520 Ventura Blvd in Studio City. This division works to ensure the proper care and protection of animals which appear in filmed entertainment, said Beck. “The American Humane Association film and TV unit has continued its efforts to protect animals on film sets for over 65 years.” The division will be relocated into their new facility before the end of this year. Staff Reporter Andrea Alegria can be reached at (818) 316-3124 or at aalegria@sfvbj.com

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