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The Hidden Cost of Retail Bankruptcies: Abandoned Goods in Warehouses

Apr 26, 2021 by Maurie Backman
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The coronavirus pandemic battered retailers, and over the past year, numerous well-known names have been forced to file for bankruptcy. That's been really bad news for shopping center and mall REITs (real estate investment trusts), which routinely rely on those retailers to pay rent. While bankruptcy doesn't always mean a winding down of operations and store closures, often, it does.

During the summer of 2020, men's clothing outfitter Brooks Brothers filed for bankruptcy. It was then sold to Authentic Brands Group LLC and SPARC Group LLC, a venture created by well-known mall operator Simon Property Group (NYSE: SPG). Yet the scooped-up retailer left one thing behind in its wake -- a warehouse full of abandoned inventory.

Could warehouses get stuck with unclaimed inventory?

In the course of Brooks Brothers' bankruptcy, it left loads of inventory behind in a Massachusetts warehouse -- everything from mannequins to furniture items to Christmas trees and ornaments. And that warehouse's owners were left to figure out how to dispose of those unwanted goods to clear space for new incoming tenants. Junk removal services quoted the warehouse's owners a minimum of $240,000 to clear the remnants of Brooks Brothers' tenure -- a price tag those owners couldn't swing.

How did this happen? Apparently, when Brooks Brothers was sold, the warehouse in question, along with its contents, was not included as part of the deal. As such, Brooks Brothers' new owners weren't deemed responsible for clearing out that warehouse and disposing of or selling its contents.

Now, this happens to be a one-off story. For the most, bankrupt retailers aren't just closing up shop and leaving warehouses on the hook for clearing out inventory. But it does bring a new concern to light for warehouse investors.

As retailers continue to get hammered as a result of both the pandemic as well as a general shift to online shopping, many may be forced to file for bankruptcy and shut down operations. And that could, in turn, result in a scenario where warehouse owners are left holding the bag as far as unwanted inventory is concerned.

Of course, there are potential options for remedying this issue. One is for warehouse operators to take a substantial security deposit at the time a new contract is signed. That deposit could, in turn, offset the costs that the operator might later bear if forced to deal with a pile of leftover inventory. But given the size of some warehouses and the cost of clearing out unwanted goods, that may not be a perfect solution.

Warehouse operators will therefore need to be careful when signing lease agreements with tenants, especially given the potential for more retail bankruptcies in the near term. Meanwhile, industrial REIT investors will need to keep this issue on their radar. While there's been a huge uptick in demand for warehousing space, the last thing any distribution center wants to get stuck with is piles of goods that aren't being moved. And while what happened with Brooks Brothers certainly isn't the norm, it remains a concern nonetheless.

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Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.