by Lenny Pierce, Research Analyst
On February 4th, office supply chain Staples announced that they will be acquiring competitor Office Depot for $6.3 billion. The deal comes just over a year after Office Depot incorporated another office supply chain – Office Max in November of 2013. We reached out to our brokers here at CBRE New England to get their take on how this consolidation of the nation’s two largest office supply chains could affect commercial real estate in New England.
Sam Crossan, an office leasing broker for The Greater Boston Area’s Metro West market, says this acquisition will have a negligible immediate impact on Staples’ corporate headquarters at 500 Staples Drive in Framingham. “Considering Staples and Office Depot are direct competitors, a merger will result in organizational overlap,” Crossan said. “The acquisition will allow Staples to grow their market share, streamline their operations and increase efficiency, which at some level will result in restructuring their personnel. At this point, it isn’t clear where those cuts will be made, and whether there will be any impact on their Framingham office footprint.”
The impact on both Staples and Office Depot retail locations in New England is less clear. Kevin Higgins, a Senior Vice President/Principal of CBRE/Grossman Retail Advisors, LLC said that since some Staples locations are very close to Office Depot locations, Staples will need to consider which location to close on a case-by-case basis. “They will decide which location is best to keep open based on the rent and lease term, store size, condition of each store, co-tenancy, ingress/egress and where they are drawing customers from as one location may be more convenient to its customers than the other” Higgins said. According to Shopping Centers Today, the deal could mean the closure of 1,000 stores nationwide, since approximately half of all Office Depot stores are located within 5 miles of a Staples location.
All in all, Staples has about 1,300 US locations. Office Depot has 1,900 stores, but a portion of those are former Office Max locations which the company is still working to close.
Higgins noted that the notion of maximizing spatial efficiency has been a priority for Staples as of late. “Over the last few years, [Staples] has been rightsizing many of its stores, from 25,000 square feet to 15,000 square feet, either by downsizing in place or relocating. Office furniture used to be a big part of its business but it isn’t any longer, at least not in the stores where the furniture took up a lot of floor area. Now, people order it on line and it is shipped directly from the warehouse to their offices.”
Jeremy Grossman, Senior Vice President and Principal of CBRE/Grossman Retail Advisors, spoke to the ability of New England landlords to backfill the Office Depot and Staples space that will be opened up by consolidation efforts. “There are fewer retailers operating stores in their size range. This issue will force landlords to get creative with the space, subdividing or mothballing space to improve the chances for leasing” said Grossman. “Luckily, older leases will offer the landlord the opportunity to create additional value by achieving market rent from the replacement tenant(s), or at least cover leasing costs assuming a subdivision.” All in all, Grossman thinks the oncoming vacancies should be viewed as good news for growing retailers as the locations of said space are very competitive. “Both Staples and Office Depot did a nice job selecting quality locations in strong retail markets. Bringing new space to the market in such locations will be well-received by active retailers focused on growth.” Grossman identified fitness, traditional retail, and restaurants as retail types who would be great candidates for the spaces should they become subdivided, and larger tenants like Michaels, PetSmart, and entertainment concepts as options should the space remain intact.
This agreement comes 18 years after Staples’ first attempt to purchase Office Depot in 1997, a deal that was ultimately stopped by the Federal Trade Commission due to concerns over reducing competition in the office supply industry. Though this deal will still draw scrutiny from the FTC, Higgins feels that the modern conditions in the retail industry mean it has a much better chance of being approved. “Online shopping was not a factor at that time as it is now, which is favorable to the merger” said Higgins. “The consumer has many options when it comes to purchasing office supplies.” Staples is no stranger to the importance of an online retail presence. The company is currently the #3 internet retailer, behind only Apple and Amazon and since Office Depot was #9, the merger will only strengthen their internet presence.
For more updates on the Staples-Office Depot merger, including the final decision by the FTC, stayed tuned to CBRE New England’s M&A Watch by following us on Twitter at @CBRENewEngland.