This the subject of the Strolling the Agora column in the April 4th, 2010 issue of Shopping Center Digest.
Though leasing and development is far from “frozen while landlords await a spring thaw,” it definitely has slowed over the last few years, with the more aggressive and hungry operators working overtime to find new ways to stimulate dealmaking in this very deep recession. Thus far, most landlords and tenants are using old and reliable techniques that have done well for them in the past; as we discussed in the last issue, retailers are taking advantage of conditions within the shopping center industry to negotiate short-term leases at agreeable rental rates for pop-up stores, and are using the latest technology to measure data testing numerous new concepts and demographics.
Going forward, the main obstacle to complete that deal today – after preliminary negotiations have been undertaken – is still the rent required by the owner-developer. After talk of short-term leases, numerous concessions on such standard “perks and allowances” covering CAM, fees, fixturing, and clauses related to kickouts, co-tenancies and the like, some landlords finally admit that “free” does not cause nausea or an allergic reaction.
One Florida-based strip operator conceded a while back – not for publication then– that he was offering free rent in extreme instances, depending on the center and the Mom and Pop operator. Another Midwest landlord admitted that free rents are being offered now for “several months” just to get a tenant into a troubled property to avoid an even steeper slide in property values.
One Mom and Pop in San Diego noted he was not considering opening a second store because of the cost and risk. Then Westfield offered him “a deal he couldn't refuse” and he took units in three local shopping malls in the area.
At times, a major source of leads could be existing tenants. “They have close relationships with other retailers and their recommendation can be a foot in the door to start negotiations,” said one broker.
As an example, Janine Landolina, a leasing agent at Treasure Coast Commercial Real Estate, said “I've recommended Landlords create a Tenant Referral Program for their existing tenants, giving them something (month free rent) for any referral tenant that signs a lease. This is something new we are about to implement with several different Landlords of different property types. By the end of August 2010, we will [be] able to determine if this program is generating results.”
Philip Stewart of Stewart Realty has placed a sign at one of his centers offering three months free rent to entice retailers and/or office tenants on the top floor of his project; he added that some are downsizing from 10,000 sq. ft. to 5-6,000 sq. ft. to cut operating costs and get rid of excess space, or re-locating from A space to B space and take advantage of lower occupancy costs.
Then there are the possibilities of introducing innovations in agreements, such as suggested by Deepak Vora of DVR Design. “How about exploring a lease with terms similar to a variable rate or a hybrid mortgage? The initial rent could be low and then adjusted upwards as the economy improves; it could be tied toGDP or some reliable sales data benchmarks. To keep investment manageable a master plan for tenant improvements can be prepared and the improvement done on an on-going basis as economy improves.”
And there's Leighton Hunziker, president-asset & property management at Savills: “We're doing deals here that effectively put the tenant on % of sales in the first year, and in the second year locks in a portion (85%) of that as the base rent with a Natural Break Point applied to the rent. Not ideal from a purely investment perspective but it's a tenant with the lights on paying rent! It stimulates the Landlord to target marketing to grow sales, and the tenant is incentivised to work hard to generate sales.”
Peter D. Morris, CEO at Greenstead Group, noted that “tenants will continue to 'trade up'. As the evolution continues those at the bottom will die out. To stimulate leasing, each property owner needs to refine [his] message… be a conduit for reaching a desirable market [and] a defined market. Therefore, it is important that each shopping center completely knows its market niche and builds a brand around that.
“Geography alone and filling a center with any warm body won't cut it as we move well into a mature phase in the industry,” he said.
Understand What Retailers Need
“Retailers are looking for the best markets for their buck,” Morris pointed out. “Individual landlords can stimulate their leasing by understanding what each retailer really needs in a market and matching their efforts to the highest prospects.” He touched on multi-channel merchandising and “how the unique E-commerce landscape is going through the most radical shakeup of any retail strategy of all times… Government statistics are trending to 35% of all core retail sales to be online in 10 years.”
Gail Nichols of The Now Mall Corp said she's negotiating with “several of the Top 100shopping center developers to implement our Rapid Online Order Fulfillment (ROOF) program to redirect lost online sales back to the stores and improve customer loyalty. In turn, this will retain and attract tenants, improve profits and market cap.”
Many retailers are closing lower-producing stores when leases expire, she continued, while they focus on growing online sales. Among these: “William-Sonoma@36.5%; Urban Outfitters@35.9%; Staples@31.7% ($7.7 billion)… As online sales continue to rise at the expense of in-store sales, their 20% to 30% return is also growing because consumers are not happy with the current 3 to 10 day shipping and the high shipping costs. And ship-to-store for pickup is no faster or less hassle.
“When shopping centers implement [ROOF with in-store shopping and delivery],” said Nichols, “these lost sales will return quickly. And they also gain new customers they never really had before… seniors; people with disabilities; busy families & offices.”
Then there are the possibilities of introducing innovations in agreements, such as suggested by Deepak Vora of DVR Design. “How about exploring a lease with terms similar to a variable rate or a hybrid mortgage? The initial rent could be low and then adjusted upwards as the economy imporives; it could be tied toGDP or some reliable sales data benchmarks. To keep investment manageable a master plan for tenant improvements can be repared and the improvement done on an on-going basis as economy improves.”
In the Houston market, the luxury-oriented Highland Village took excess space and used it to improve the overall shopping experience. It created a Farmers Market for local farmers and producers to market fresh fruits and vegetables, and also an Adoption Center for a non-profit organization to operate a weekend aimal adoption center which has placed over 1,650 dogs and cats in private homes over the last three years.
The center also runs complimentary valet service, 24-hour security, live holiday music and a trolley transportation service that takes shoppers around to the stores and to their homes in neary neighborhoods.
Generating New Life
And there's also the push by leading retailers to go offshore. Some point to Canada as a primary target: “It's in a nearby market,” said one consultant, “that is not as foreign as Europe or Asia or the Mid-East, with the potential much greater.” He pointed to 14 sq. ft. of shopping center space per capita there, as compared with about 23 in the US, and consumers in Canada are already aware of US brands; “some are producing 2.5 times the sales per sq. ft. as their US stores.”
This is where J. Crew is scouting its first non-US locations, and the focus directed there by others as Gap, Limited, and its various divisions: Bath & Body Works, Victoria's Secret, and its acquisition in 2007 of lingerie retailer La Senza…”giving it something to build on.”
Established names still have great marketability, even for a failed enterprise. Recent examples, of course are such once-proud operators as CompuUSA and Circuit City.
These brands were acquired last year by Systemax Inc, parent company of TigerDirect.com, and re-born as online retailers. Traditional brick and mortar stores were first tested cautiously in the US and Canada, and now there are plans to increase this presence – there are now 34 CompuUSA units; among markets being considered for new and expanding units are Houston, Chicago and Florida, and Canada.
“Recession hurts, but it also creates opportunities that would not have existed otherwise,” said CEO Richard Leeds.
As above, some of the suggestions as ways to stimulate more dealmaking may tie-in directly to the focus of those servicing specific areas of the shopping center/retail chain industry. For example, Michael Morelli of Tampa Bay Signs: “This is where I think by establishing a relationship to be able to offer the potential tenant their exterior signage at a discounted rate by working with one company can benefit the agent, leasee, and sign company.”
Dealmakers have always prided themselves on finding ways to get the lease signed. “That's the art of negotiating,” said one seasoned veteran. “If both parties come to the table and sincerely want to make it happen, it will. All that's required is giving a little here, getting a little there; both may not be completely happy with the final agreement, but that's one way to gauge that it's fair in the current market.”
Further information on Shopping
Center Digest, our weekly Eflash, Expanding Retailers,
and the annual Directory of Major Malls may
be obtained from our website, www.shoppingcenters.com.
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.
About Murray Shor:
Reporting and writing on the shopping center/retail industry since the late ’60s. Began as editor at Chain Store Age, founded Shopping Center World (now Retail Traffic), Shopping Center Digest “The Locations Newsletter” in 1973, and the Directory of Major Malls in 1979. Each issue of Shopping Center Digest contained a column called Strolling the Agora which provides commentary on trends, activity, issues of concern to development and leasing in the shopping center/retail industry.