State of the Shopping Center Industry

You don't have to be an inspired prodigy or a master dealmaker to recognize that “it's rough out there.” However, it does take experience and imagination and fortitude to recognize the opportunities – “Hey, even in the worst of times, someone is able to make a buck” – and take advantage of them.

And, said one veteran, “The challenge is to survive until a rising tide lifts all boats.”

We all know that the dismal holiday season, with a substantial drop in shopper traffic, retail sales and overall consumer buying – despite steep discounting–is forecasting major retail bankruptcies and store vacancies within the next few weeks; mavens involved in market research are predicting 200,000 store closings this year.

These increased vacancies to shopping center landlords mean reduced revenues, higher CAM costs, more pressure on them to cut rents on new deals and re-leasing; these result in lower values on their portfolios, causing higher interest rates for re-financing – if money is even available. Some have been selling off some centers to assist in re-financing or to raise money for debt coming due, or to put themselves itself into a better position to acquire other properties from competitors.

Some investors have formed new entities designed to take advantage of the turmoil and acquire distressed properties, or choice properties that cash-strapped owners have to take to market. They have advance financing in place so they can move quickly to finalize these deals.

Staff Cutbacks

Retailers and developers have been cutting back on staff across the board to stay viable, letting go some dealmakers with 30 years and more of experience. Some consultants have been moving their offices into their homes to reduce costs; others have started divisions to diversify into other areas of commercial real estate besides shopping centers, such as offices, industrial, warehousing, or residential. And, high on the list for tenants, going back to their landlords for rent relief, improved allowances for fixturing, re-modeling, and the like.

One surprising – and positive– effect on new development, one major landlord pointed out to us, is that some of their projects – expansions, renovations, and new construction – have been coming in under budget due to lower costs for materials and labor.

Another interesting sidelight is that some younger professionals are returning to college for specialized or advanced degrees, with plans to return to the shopping center/retail industry when the economy and dealmaking improve.

Some industry professionals are anticipating the federal stimulus package by the new administration will begin to impact on the economy by mid-spring and help to improve consumer confidence. They expect, therefore, the positive effect on dealmaking should begin shortly after and carry on through the rest of the year and into 2010.

“Those retailers able to make deals now will be in a better position to take advantage of opportunities to increase their market share over their competitors,” said one.

Current Environment

This, therefore, in very general and simplistic terms, is the current environment. What is being done by tenants, owner-developers, those involved in dealmaking to continue to operate and remain in business?

They are making deals – certainly fewer, harder, and not as lucrative. Some retailers and landlords are pushing for early renewals on existing stores. For the tenant, they can extend the benefits of the existing climate to years into the life of the lease; for the landlord, it helps keep occupancy rates higher and maintain a strong negotiating position for future deals with other retailers.

In order to obtain rent relief, some tenants are agreeing to modify lease terms that are unfavorable to landlords, such as exclusives, co-tenancies or use clauses or renewal options. One developer said he's agreeing to reduce the rent, provided the tenant agrees to return to the original rent or terminate the lease if a third party offers to lease the store at the original or a higher rate; other requirements could include lease extensions, that the tenant remain responsible for the original amount owed on the lease if he were to default, that the reduction is a one-time deal, and that confidentiality is maintained.

In some instances, a rent reduction may help the tenant stay in business until the economy improves. It saves the landlord from the cost and effort to find a replacement tenant in a challenging environment, and helps him maintain a higher occupancy level in the center; another important consideration: it may deter other retailers from going dark.

Early Agreements

Several more landlords have formed in-house committees which meet regularly to review requests from tenants requesting rent relief, since we first mentioned this in an earlier column, (See SCD, Agora, Page J242).

On new leasing deals, both landlords and tenants speak of the advantages of reaching early agreements now, for openings later in 2009 or even 2010. The tenant gets a lower initial rent, using his current negotiating leverage to keep this expense down, and the owner-developer receives a solid commitment putting him in a better negotiating position with other potential tenants coming to the table later in the process.

Right now, those retailers best poised to continue expansion are the discounters, lower-end chains, those focused on teens and younger adults, and fast-food and family restaurants. Also, for landlords, alternative users who rarely, if ever, sought locations in shopping centers: churches, schools, offices, health-related services.

This column is re-printed from the January 19, 2009 issue of Shopping Center Digest “The Locations Newsletter.” A sample copy of a recent issue of this twice-monthly publication covering development and leasing in the shopping center/retail chain industry in the US and Canada may be obtained from our website, www.shoppingcenters.com.

NY Deal Making 2018