Strolling the Agora: With Leverage Finally On The Side Of Tenants, How Are Landlords Reacting?

As long as this shopping center/retail chain industry has been around – at least for the last 40-some years – the leverage at the negotiating table has been overwhelmingly with the owner-developers. That is until this massive recession hit, new development came almost to a standstill, and vacancies from the smallest strip to the biggest mall began to go through the roof (pun intended).

Tenants, and it's not just the discount/dollar stores, the fast food and restaurant chains, the sporting goods operators or electronics retailers still in business, or the teen-oriented specialty chains that are taking advantage of this new-found power. It has spilled over to regional operators, Mom and Pops, temporary retailers, innovative merchants wanting to test new concepts and markets, and even those not normally interested in locating in a shopping center but lured by rock-bottom rents, central location, and numerous other reasons and concessions. Franchising is a big source of potential retailers as numerous operators eye entrepreneurs as likely partners due to their access to off-shore financial markets.

Oh sure, some may contend the landlords never had overwhelming muscle when it came to striking a deal, because they “really needed that anchor, or that dominant retailer, or that high-prestige fashion plate” to make the project happen. And there's a lot to be said for the need by high-profile merchants to have some say in how the center or mall is marketed, or what other retailers would be permitted in, and what prime locations they would have.

This is behind the retail heavyweights of the past, such as Sears or May Stores or Dayton-Hudson for malls, or Giant Foods, Acme Stores, Safeway Stores or Gamble-Skogmo for grocery-anchored strips, establishing their own development divisions. Or why discounters like Wal-Mart or Kmart designated operators in key markets to be their prime developers.It was all done to protect their substantial financial investment and to be able to control their destiny within the shopping center.

These were the exceptions. In most instances, the landlord set the rules and Triple-A or national tenants got the best deals, the earlier they signed the better; they were necessary to hit that 70% of signed leases to obtain financing, but they still had little, real bargaining power. And the other retailers provided most of the profit for the project. With the surge to the formation of REITs and the creation of behemoth landlords, the balance was tipped even more to the side of the owner-developers. 

Now, pointing to the depressed economy and declining retail sales and profits that have caused many competitors to close up, the remaining merchants still in business and looking for locations are relishing this change of fortune. A cliché: “In the country of the blind, the one-eyed man is king.” A viable tenant who used to open 50 stores annually and is now looking only for 20 when others aren't 'open to buy' has a lot of muscle.

So rent reductions, and fixture allowances, and “finished stores” and dozens of other demands that a few years ago would cause a landlord to ask for a sanity hearing, are now part of the opening gambit in negotiations.

So, how is the landlord, more used to a “take it or leave it” approach reacting to this? How is he and his leasing representatives working to turn the tide and make those deals that will keep the tenant list filled and the shopping center viable?

Among the first steps is getting existing tenants to renew, which both sides are agreeable to, with rent reductions, tenant improvements, reducing operating hours, co-tenancy clauses, and numerous other concessions and details being hammered out.

With many empty big-box stores and prime locations going dark, landlords are eager to fill the gaps with almost any tenant offering a basic rent. This is why many of these locations are going to “pop up” stores, temporary and specialty tenants, salvage grocers, kiosk-oriented tenants, retailers looking to test new concepts and new markets, deals with permanent chains offering very short-term leases of two or three years, permitting “kickouts,” percentage rents, finished stores, etc., etc.

An interesting trend is that many discounters, home improvement chains, ethnic-oriented merchants, even dollar stores, are willing to take a risk on major downtown locations in large cities they usually ignored, cities like New York, Chicago, Miami, Los Angeles, Portland, Dallas. 

In essence, on the table are any concessions a viable tenant is willing to ask for. And many times, to their surprise, they are being accepted by landlords.

They are eager add medical and dental offices, schools, libraries, municipal agencies, to try new concepts, such as water slides or indoor go kart tracks in place of empty “canyons,” nearly-new shops, pawn shops, and they may even look the other way when merchandise edges out into the common area – unless there's a strong complaint from a retail neighbor.

Many in the shopping center/retail community are optimistic that there will be a turnaround next year, with the most cautious not expecting it until the second half of 2010. As reasons for their optimism, they point to more positive financial results from key retailers, polls showing a rise in consumer confidence, improvements in numbers from Wall Street, drops in the increases of jobs lost, rising home prices in some areas around the country, and the like.

Though back-to-school was not a great success for the majority of tenants, some were gratified with better-than-expected sales. However, all mavens are holding their breath awaiting sales figures for the most important selling season of all, November-December holiday sales.

No matter what their expectations and plans are now, all can change if those few weeks produce dismal results. However, if sales improve and are better than expected, the optimism may spill and result in more leasing and development deals from early 2010 and beyond.

It may take years though, many contend, before all the current empty stores are filled and a big push for new development and shopping center expansion swings leverage back to the side of the landlord.

More information on the twice-monthly SHOPPING CENTER DIGEST and our associate publications, EXPANDING RETAILERS and DIRECTORY OF MAJOR MALLS, may be obtained from our website, www.shoppingcenters.com.

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Strolling the Agora was a twice-monthly column discussing trends, issues of importance, and commentary on the leasing/development aspects of the shopping center/retail chain industry in the US and Canada. Called Strolling the Agora, it was a part of Shopping Center Digest, a newsletter founded in 1973 published until September 2010. The column provided expert insight into various retail focused topics. It was primarily authored by Murray Shor, Editor & Publisher as well as industry and veteran retail experts.  A smattering of archived columns are presented here for your reading “pleasure”. It's an interesting “look back” at what were current hot topics at the time with regard to shopping center/retail industry focus, development and leasing expansions and processes, retail mix, opinions and more.