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Emerging Themes: Concessions, Cutbacks, Development Delays

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Here's a trifecta of stories that illustrates some of the major trends dominating retail real estate right now--leasing concessions, cost cutting and delays in new development.

The Dallas News took the latest look at the evolving relationship between landlords and tenants noting the rise in concessions. Landlords, to keep tenants in place, are being forced to renegotiate leases, cut rents and offer other goodies to troubled retailers.

Some tenants are using bankruptcy and early lease termination clauses as leverage for lower rent. They're requesting offset rights – an agreement that states, for example, that if a landlord can't deliver on $500,000 promised for tenant improvements, that amount can be deducted from the tenant's rent. Tenants also are getting free rent, downsizing their space, renegotiating lease terms and receiving more tenant improvement allowances.

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Some landlords are rushing to renew leases early – up to four years early – to keep tenants amid increasing vacancies. Others are offering help early, but they want to review the tenant's balance sheet.

Dallas-based retail property manager Cencor Realty Services is addressing potential problems. A team meets for two days a month to scrutinize each shopping center and retail tenants' sales and financial statements, said chief executive Herb Weitzman. It also will help arrange financing for some tenants and help others sell their business, he said.

"We want to help keep these tenants alive," Weitzman said. "We learned in the '80s and '90s what it cost – we burned up so much money."

My comment: Details like this are really critical right now. I believe owners and managers should be sharing best practices. These sorts of anecdotes will also provide clarity on what prevailing concessions in the market should be. Not every retailer, however, deserves kid glove treatment. Sharing information will also shed light on which retailers are trying to take advantage of the environment to get more than they need. Moreover, landlords should have a view as to the retailers that have the best shot at returning to health when the economy improves. It doesn't make sense to prop up a retailer that's doomed to fail.

The Chicago Tribune looked at the second trend--examining how retail landlords are looking for cost savings in the current climate.

Some others have tweaked around the edges of their business by turning down the thermostat a bit or delaying when the escalators turn on.

"There are a lot of small things that add up to a big number after a while," said Northbrook Court marketing manager Arnie Cohen. "Even though some people might think that changing a light bulb may not be a big deal, that coupled with other cost-cutting measures can result in a large cost-savings." Northbrook is using more energy-efficient light bulbs and "tweaking" the temperature in back corridors, as opposed to retailer space, to reduce costs, he said.

The mall is also saving on greenery beginning this quarter. In common indoor areas, "we're going toward [buying] more green plants, instead of flowers, which are more expensive," he said.

Outside, the mall will swap its annual plants, which have to be replanted, with perennials that return to bloom for several years. Cohen said perennials save on labor costs and materials. Additionally, timers were connected to the sprinkling system last year, assisting in water-cost savings.

My comment:I found this passage particularly illuminating. This isn't the kind of thing we've written about yet at Retail Traffic and gives me some ideas of what kinds of questions we should be asking owners and managers.

Lastly, the Sacramento Bee points out the latest example of a major development getting delayed.

No one talks that way these days. Work on the Elk Grove Promenade has been stopped for months. And the news grew worse Friday: The project has been put on hold indefinitely.

General Growth spokeswoman Nicole Spreck said the company has "suspended" its most recently promised completion date – fall 2010.

"It's disappointing," said Elk Grove Mayor Pat Hume when informed of the decision Friday. "I understand they want to open to a strong market. So, I guess the best we can do is hope for a speedy recovery to our economy."

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Elaine Misonzhnik

Senior associate editor Elaine Misonzhnik has been writing for National Real Estate Investor since June 2006 and has covered commercial real estate for more than 12 years. She first became...
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