For about a year, Levin Management Corp., a Plainfield, N.J.-based real estate services firm which manages a 12.3-million-square-foot retail portfolio, has been getting an increasing number of calls from people looking to start retail businesses.

Today, approximately 20 percent of all calls the company’s leasing department takes are from potential tenants who have either no stores or only one or two locations, says Matthew Harding, company president and COO. Some of the proposals are admittedly laughable, with the “prospective tenants” having no real ideas and telling Levin they will sell whatever it is the firm wants them to sell. They see an empty space in a mall and call to ask “What would you like us to put in the there?” Harding notes.

Others might have a valid idea for a new concept, but no previous experience in retail and little to no investment capital. These kinds of entrepreneurs can succeed if they find an experienced partner or opt to run a franchise, but are not likely to survive in the retail business on their own, experts say. But among all the non-starters and penniless dreamers, it’s still possible to find a concept or two that can become a valuable addition to a property. The trick is recognizing who has what it takes.

“Incubating,” or helping launch unknown tenants through short-term leases, has become a popular tactic in a market that’s been ravaged by store closings and bankruptcies. At the end of first quarter, vacancies at neighborhood and community shopping centers reached a 19-year high at 10.8 percent, according to Reis Inc., a New York City-based research firm. Vacancies at regional malls were at 8.9 percent—the highest level in the 10 years Reis has tracked the sector. Most researchers forecast that vacancies will continue to rise through 2010 and will decrease at a very slow pace in 2011.

Most national tenants are not growing. In fact, many are still in the process of right-sizing portfolios. For example, Gap Inc., a staple tenant in regional malls, plans to open only 10 of its namesake stores this year, 15 Old Navy stores and five Banana Republic stores. But after its planned store closings are taken into account, it will actually end up with fewer stores than in 2009. To make up for the lack of leasing momentum from the nationals, landlords have had to take a more favorable stance toward little known independent retailers.

That’s why last fall, Levin Management launched business incubator programs at two of its properties, the 163,000-square-foot Hickory Plaza in Hickory, N.C. and the 227,000-square-foot Liberty Center in Erie, Pa. The programs offered flexible, short-term leases at entry-level rents to those looking to launch new retail operations. Levin held open houses for potential tenants at the properties and provided information about how to set up a business.

“In Erie, we have a lot of smaller shop space and a lot of competition from other landlords, so we are trying to make ourselves a little bit more attractive,” Harding says. “There are [fewer] stores now that take satellite space because of the bankruptcies and limited expansion, so we have to go out and find different users for that space.”

Madison Marquette, a Washington, D.C.-based retail developer with a 20-million-square-foot portfolio, has also launched an incubator program that incorporates a contest for aspiring start-ups called Retail*Star. First announced last spring, the contest offered residents in close vicinity of Madison Marquette’s Bayfair Center in San Leandro, Calif., the chance to showcase their retail idea to a panel of industry experts. The winner, a tea lounge/education seminar service called TeachBar, ended up with a 1,300-square-foot space at Bayfair, $250,000 in free rent, $25,000 in additional investment capital and a build-out allowance. Madison Marquette has also done some business with the runners-up, signing four permanent leases at its other properties.

The contest turned out to be so successful, this year Madison Marquette is launching Retail*Star again. By late March, the firm had already received more applications to enter the contest this year than last. In the spring of 2009, 66 people sought to become contestants.

“The reason we created this program from scratch was we were in a difficult leasing and economic environment, so we wanted to find new compelling uses,” says Eric Hohmann, managing director of property investments with Madison Marquette. “And we wanted to communicate to the industry that we were capable of creative management/leasing techniques. The advantage is that all a Retail*Star participant has is a good idea. We don’t ask any other questions.”

The challenge for the Retail Star panel of judges, as well as for any other property owner or manager dealing with an untested tenant, is recognizing entrepreneurs who can create successful businesses from scratch. Part of the decision-making process undoubtedly comes down to intuition, says Whitney Livingston, regional director of marketing with Madison Marquette who helped organize the contest. But there are also some guidelines that experienced leasing professionals use to help them identify long-term potential of new lessees.

For a concept to be successful it has to be unique and fill an existing need within a mall or shopping center, experts note. The person launching the business needs to have previous experience in retail operations—such as running their own stores or working for another retail chain. They have to be willing to use their personal savings for living expenses while the business gets established, which can take more than a year. A tenant must be willing to spend long hours minding the store. Perhaps most importantly, they need to have true passion for their concept and be willing to tweak the operating model to serve customer needs.

For example, Ben Wanzo, last year’s Retail*Star winner, is an energetic former high school teacher and McKinsey consultant who had a clearly articulated, unique idea for a business that fit well with Bayfair’s demographic, according to Livingston. His concept, a tea lounge that offers educational seminars ranging from SAT preparation to foreign language classes, is in tune with the current economic climate, when many people are looking to change professions.

Wanzo says he would not be able to execute his concept successfully without help from Madison Marquette, which included input from a business consultant and high-end store and logo designers. “Just the capital that they provided was huge because it allowed me to essentially get into a store with minimal investment on my own,” he says. Prior to seeing the contest advertised in the Oakland Tribune, Wanzo thought about offering classes online.

Part of the reason he won, according to Livingston, is his obvious business savvy and ability to adapt. “We didn’t have 100 percent confidence the idea would work, but we believed in Ben’s ability to have the foresight to adjust the model if it wasn’t going the way it was planned,” she notes. “If tea wasn’t selling, we knew Ben had the business acumen to adjust the menu quickly before the business went bad. It was as much about the entrepreneur himself, as it was about the business concept.”

Hot or not?

One of the difficulties in growing a new retail business is that the U.S. is already over-stored, according to most experts. Pick any category—furniture, apparel, electronics—and there are likely to be at least three or four market leaders, followed by a dozen or so smaller national players. That means anyone thinking about a new concept has to present whatever is being sold in a new, fresh way.

For example, last fall Levin Management leased a 9,038-square-foot location at St. George Crossing, a 317,417-square-foot shopping center in Woodbridge, N.J., to the Shannon Rose, an Irish pub. The store at St. Georges Crossing was only Shannon Rose’s second location. But even in a metro area that doesn’t suffer from a shortage of pubs…(Continue reading on next page.)

..., Shannon Rose stands out, says Harding.

In addition to the standard fare of burgers and beer, Shannon Rose serves traditional Irish dishes, including shepherd’s pie, fish ‘n chips, corned beef and cabbage and bangers and mash. Before launching the concept, Shannon Rose owners traveled to Ireland and visited local pubs to get an idea on how to design a storefront that would look authentically Irish. The result is a pub that is “very colorful, very different, really stands out in the shopping center,” Harding says.

On St. Patrick’s Day 2010, The Shannon Rose drew so much traffic, it was impossible to find a parking space, he notes.

Late last year, Levin also signed a 21,500-square-foot lease with No Body Denied, an up-and-coming fitness club, at Echo Plaza, a 66,000-square-foot shopping center in Springfield, N.J. The Echo Plaza spot was the first location for No Body Denied, but owner Ken Carrier already possessed 20 years of experience in the fitness club industry and had opened several health clubs in New Jersey, Harding notes. What sets No Body Denied apart from other operators is that it’s not geared toward a particular age, sex or training method. The club accepts members as young as 10 years of age and offers a diverse range of classes and equipment.

Since opening in February, No Body Denied has proved so successful it essentially serves as an anchor for the property, Harding says.

Fitting in

A new retail concept’s target audience should mesh with the demographic the center is already serving, notes Livingston. Fashion apparel seller Forever 21 opened its first mall store at the Panorama Mall in Panorama City, Calif. 21 years ago. At the time the chain was a relative unknown run by a South Korean immigrant family. Prior to the deal, the chain’s founders, Don Chang and his wife Jin Sook, ran tiny urban locations in downtown Los Angeles. Before venturing into retail, Don Chang worked at a gas station. Any mall landlord that took them in was taking a risk, notes Craig Johnson, president of Customer Growth Partners LLC, a New Canaan, Conn.-based consulting firm.

But the leasing professionals at the Macerich Co.-run 314,305-square-foot mall recognized that they were targeting the same kind of customers—young multi-ethnic shoppers who were looking for inexpensive, fashion-forward apparel—that Forever 21’s downtown Los Angeles stores attracted in droves, says Randy Brant, executive vice president of real estate with Macerich. In addition, the median household income for the city of Los Angeles matched Panorama City’s mid-$40,000 a year range. In Los Angeles, Hispanics make up 48.4 percent of the population, while people of Asian descent make up 10.4 percent. In Panorama City, approximately 70 percent of the population is of Hispanic origin. Asians make up 11.6 percent of the population.

Because of its urban location, Panorama Mall had difficulty attracting national apparel chains. Forever 21 already served a similar trade area and showed that it can make a profit. Macerich decided to sign a deal with the new tenant for 3,000 square feet.

Today, Forever 21 operates 47 stores throughout Macerich portfolio and 456 stores overall. The chain has become a phenomenal success, growing from an in-line tenant into a solid junior anchor, and is highly sought after by mall landlords.

“The young women who are the bread-and-butter of a lot of these malls love this place,” Johnson says. “You’ll see a car pull up and there will be three or four or five of them descending on Forever 21. If you are a mall operator, you see these women and you get dollar signs in your eyes.”

Personal matters

Beyond the concept itself, landlords have to consider the personality and professional and financial history of would-be entrepreneurs. While today many people are seeking to launch businesses because they’ve been laid off from their previous jobs, to be successful in retail you need to have a true passion for what you are doing, says John Bemis, executive vice president and director of leasing at Jones Lang LaSalle Retail, an Atlanta-based third party property manager. The hours, especially in the first few years of operation, are long; whatever profit the store makes has to be put back into the business. In addition, landlords today often demand personal guarantees from independent retailers, which means that if you want to sign a lease, you have to put your family finances on the line.

Last year, Jones Lang LaSalle Retail signed 27 permanent leases portfolio-wide with merchants who previously operated on licensing agreements—short-term flexible leases that allow a landlord to gauge whether a business model is viable. Among them was a Japanese fast-food restaurant, a church outreach service, an eyebrow threading salon and a women’s ready-to-wear boutique.

“It’s certainly not an easy business,” Bemis says. “Some of the things we look for is do they understand the realities of it? Do they understand the hours involved? Are they knowledgeable about what they want to do? They may not have run a retail store before, but maybe they were a buyer or maybe they were on the operations side. Are they prepared to learn and improve in the areas that are deficient or do they have people in their group who can help them?”

Macerich’s Brant points to Don Chang. In spite of Forever 21’s success, Chang continues to work relentlessly, he notes. He is personally involved in all real estate decisions. He is constantly traveling and taking stock of the competition. Recently, on a visit to a retail center with Brant, Chang pointed to a national apparel chain and expressed surprise that the chain has been able to get away with selling the same model of pants for 20 years.

Similarly, when Home Depot founders Bernie Marcus, Arthur Blank and Pat Farrah started opening their first stores in Atlanta in the late 1970s, in a down market like today’s, they were willing to stand outside the stores and hand out dollar signs to passersby to get across the idea that Home Depot equaled savings, says Michael Folio, operating partner with the Shopping Center Group, an Atlanta-based retail leasing and management firm, and former senior vice president of real estate for Home Depot. As the chain expanded, if customers were unhappy with an aspect of the store experience, they tweaked the store model. Each of the chain’s founders also had previous experience working for home improvement retail chains, including Handy Dan Hardware and Homeco.

Brant advises landlords to go after hands-on operators like these who have very strong ideas about what they want, rather than the more easygoing variety of retailer. To get a sense of what someone may be like as a store owner, experienced property managers suggest asking for a detailed business plan if the prospective tenant doesn’t have an existing location. The plan should outline exactly what the concept is, who it’s supposed to serve and what kind of an expansion the entrepreneur plans for the long-term. If the person has one or two stores open, the experts suggest visiting them to check whether the owner is on-site every day, how clean and well-run the place is and whether it’s merchandised properly.

“I’ve been in this business a long time and the one thing I’ve found is that a retailer that is a perfectionist, a retailer that wants the store to look a certain way, that wants a particular location and won’t take another, those are the ones that are a bit more difficult to deal with, but they make the best retailers,” Brant says. “The others, who say okay to [everything you suggest], that’s a warning sign that they may not be successful.”