18 September 2019

Executive Summary

  • Teen apparel retailer Forever 21 voluntarily filed for Chapter 11 bankruptcy protection on September 29.
  • The company has requested interim approval of two debtor-in-possession (DIP) financing facilities comprising a $275 million senior-secured asset-based revolving credit facility led by JP Morgan and a $75 million loan credit facility funded and agented by an affiliate of TPG Sixth Street Partners.
  • Although potential Forever 21 store closings will have an impact on the industry, many landlords have been monitoring the struggling retailer for some time and have been prepared for the bankruptcy filing. Numerous strategies for repositioning affected store space are already in place, buoyed by many other retailers announcing thousands of store openings across the U.S.
  • The company plans to close 178 stores in the U.S. While the company will close most of its international locations in Asia and Europe, it will continue operating in Mexico and Latin America.
  • Forever 21 began overhauling its operations in June while also negotiating a pre-bankruptcy deal with major mall owners Simon Property Group and Brookfield Properties for rent reductions and conversion of rent into secured debt. Negotiations to aid the struggling retailer broke down and Forever 21 filed for bankruptcy without a deal in place.

Overview of Forever 21 Real Estate Portfolio

Forever 21 currently has 800 stores worldwide, 549 of them in the U.S. Sales have been declining for the trendy, fast-fashion retailer, compounded by overall sluggish teen apparel sales.

CBRE Research estimates Forever 21 occupies more than 22 million sq. ft. of retail space throughout the U.S., Canada and Puerto Rico. The fast-fashion retailer expanded rapidly by both unit count and store size, taking anchor and junior-anchor positions in malls across the U.S. The average Forever 21 store size is 38,000 sq. ft., but the company also opened in many former department store locations of 80,000 to 160,000 sq. ft.

According to Creditntell, the brand has opened 39 and closed 45 stores since May 2017. The highest store concentrations are in California (19.4%), Texas (8.2%), New York (6.8%) and Florida (6.7%).

Forever 21 is considered a top-10 retail tenant by both square footage and revenue for many large mall portfolio owners throughout the U.S. The company’s stores are primarily in large malls that now face significant vacancy and revenue exposure as a result of the bankruptcy filing.

Implications for Retail Real Estate

Being hit with additional vacancy, especially in junior-anchor positioning, will burden landlords who may have already faced substantial store closings. Backfilling the resultant vacancy will take time and significant investment.

Forever 21 is still in negotiations with its largest landlords, four of which hold almost 50% of the company’s leases, to reduce store size and optimize footprint.

What’s next?

  • Expect initial closing of the weakest stores.
  • There is no quick fix to the Forever 21 challenges. Renegotiating lease obligations will provide temporary relief but will not solve the chain’s operational issues or cash woes.
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