Retailers are beginning to come to life, but leasing remains challenging.
As the U.S. economy has begun to show minor signs of improvement, so has the outlook for retail leasing. A number of tenants in the discount, warehouse club and quick-service restaurant sectors are beginning to look at expansion. The fact that there are retailers out there willing to sign new leases should give hope to real estate owners, who have spent most of the past year trying to keep their tenant rosters from falling apart. But getting retailers to commit to a new lease is not easy or cheap, leading landlords to make some difficult decisions about the benefits of filling up vacant spaces versus holding out for deals that make sound financial sense.
A recent report from RBC Capital Markets and Retail Lease Trac, a Dahlonega, Ga.-based real estate research firm, shows that 2,000 retailers plan to open 64,926 new stores in the U.S. over the next 24 months. (See story on p. 28 for more on site selection strategies).
But given the lack of available credit and the weak the outlook for consumer spending, these companies are being very careful with their money. If they are to sign a new lease, they need a financially viable deal and that means even landlords with Class-A properties might have to compromise on the terms.
“If a retailer is doing half as many new stores in 2009 as they did in 2007 or 2008, they have multiple times more opportunities,” Maddux notes, pointing to the vast number of vacancies created by the bankruptcies of electronics sellers Circuit City and Tweeter and housewares seller Linens 'n Things. “Specific markets sort of lose their significance as tenants have greater opportunities nationwide. So there might be a major opportunity in a very tight market. But during the lease approval process, if the sales forecast doesn't support the rent, the retailers feel they might as well go into another market because the profitability model [there] is greater.”
To close a new deal in this environment, a landlord might have to offer a discount of 10 percent to 25 percent on the base rental rate compared with the rents secured just two years ago. But for many tenants, that alone won't be enough, says Bridget Grams, principal with Huntley Mullaney Spargo & Sullivan LLC, a Roseville, Calif.-based real estate and financial restructuring firm. Expanding retailers also want to see tenant improvement (TI) dollars and a period of free rent during the build-out process. If construction work will take four months, tenants will generally expect two months of free rent. If the landlord requires either a corporate or a personal guarantee before agreeing to lease the space, the retailers would like for the guarantee to expire if they show a strong enough performance, she adds.
Some also request not to pay base rent during the first few months of the lease term, insisting that given today's difficult environment, during initial occupancy they should be able to pay rent based on percentage of sales, adds Eric Hohmann, managing director and head of the West Coast region with Madison Marquette, a Washington, D.C.-based investment, development and management firm. In addition, retailers are looking for leases with shorter than average terms. Whereas the standard in the industry has been 10 years, now tenants want to commit for only five years, with exit options tied in.
Requests for all these extra concessions, especially the TI allowances, have made leasing negotiations much more difficult. Many landlords might not have the funds to provide all those perks, says Maddux. They might be desperate to fill a vacant space, but agreeing to put extra TI dollars into a lease that already features a much lower rental rate might actually turn the space into a money loser.
As a result, transactions that used to close in a matter of weeks now take months. “It's a longer, slower process, a more conservative process,” Maddux notes. “The biggest difference between the summer of 2009 and the last 15 years has been the lack of urgency.”
Levin Management Corp. launched a business incubator program at its 227,000-square-foot Liberty Center property in Erie, Pa. The company set aside 20,000 square feet of space at the center in a variety of layouts to help start-up retail businesses test their concepts. The program will offer participants flexible short-term leases at affordable rents. Levin held two weekend open houses at the property on Sept. 25?26 and Oct. 2?3 to acquaint interested businesses with the details of the program. Levin created the program as part of an ongoing repositioning of the center, along with extensive renovation work and the signing of several new tenants.
What Not to Wear
General Growth Properties has teamed up with TLC Network's “What Not to Wear” series to launch “Shop Smart Look Fab,” a program aimed at educating shoppers on how to dress better for less. When shoppers log on to ShopSmartLookFab.com, they can get wardrobe tips and style quizzes created by the show's stylists. They can also enter to win a trip to New York, complete with a $2,500 shopping spree and the chance to meet the program's hosts. General Growth has also partnered with Glam Media to aggregate real-time conversations about the program from blogs and social networking sites through Glam's Tinker.com platform.
Outlet center developer Prime Retail launched Operation Shop Pink across its portfolio to help the Breast Cancer Research Foundation, a non-profit organization dedicated to finding new treatments for breast cancer. Beginning Sept. 15, customers across Prime's 21 centers in the U.S. and Puerto Rico will be able to purchase Shop Pink Bonus Cards for $2.00 apiece. The cards will result in discounts of up to 25 percent when presented to participating merchants during October, which is the Breast Cancer Awareness Month. All proceeds from the sale of the cards will be donated to the Breast Cancer Research Foundation. Prime Retail estimates that the program might raise up to $50,000.
Capitalizing on the success of shows like “Project Runway” and “Tim Gunn's Guide to Style,” mall operator Westfield launched its own Westfield Style Tour, a series of fashion events. During the program, which launched in late September, Westfield will offer styling sessions to female shoppers at six of it malls. At the sessions, shoppers will get a chance to have a one-on-one consultations with celebrity stylists that have worked with actresses from Jamie Lynn Sigler to Catherine Zeta Jones. The stylists will assess the shoppers' personal style and identify key wardrobe pieces that can be purchased from on-site retailers including Gap, Limited, Martin & Osa and Zara, among others. They will also get beauty consultations, makeovers and hair product giveaways from TRESemme, as well as a chance to win a trip to New York Fashion Week 2010. In addition, shoppers will be treated to fashion shows featuring “Project Runway” co-host Tim Gunn and former finalists Christian Siriano and Laura Bennett.