Lining up the perfect mix of stores for a neighborhood center can be as difficult as solving a Rubik's Cube. The Chinese restaurant/dry cleaner/liquor store lineup doesn't cut it anymore, many developers claim, as they seek to attract a unique blend of tenants that will provide products and services not found nearby.

Shopping center owners are thinking like retailers, studying the demographics and buying patterns of their customers, looking at surrounding properties' tenant rosters and tailoring their leasing strategies to fill gaps in the market. They are also putting a greater emphasis on wooing proven national tenants first. The mom-and-pop stores only come in after the big boys have had their say.

“If we're going to lease a shopping center in Atlanta, we have a list of preferred tenants, and for the most part we have done business with 95 percent of them,” says Thornton Anderson, head of leasing for Equity One's southeast division.

Take Arundel Village in Hanover, Md., for example. The 86,460-square-foot project, which is adjacent to mega-mall Arundel Mills, boasts a merchandise and tenant mix that is tailored to the suburban neighborhood. Anchored by a 57,860-square-foot Safeway, Arundel Village includes retailers like Bombay Co., Oreck Vacuum, Arundel Nail & Spa, Panera Bread and Baja Fresh.

“More than ever, it's important to differentiate your center from what's down the road,” says Numa Jerome, vice president of retail leasing for Columbia, S.C.-based Edens & Avant, which owns the one-year-old Arundel Village. “Merchandise mix is what drives the center and gives you greater value over the long-term.”

John Kriz, a managing director of real estate finance for Moody's Investors Service says that neighborhood center owners are becoming more sophisticated in their leasing efforts after a long history of putting up a sign and letting it do the work.

“Owners are thinking harder about what merchandise mix and what co-tenancies are best for their centers,” Kriz says. He believes that neighborhood center owners, particularly REITs and larger outfits, are slowly adopting leasing strategies that have long been utilized in the mall world, where merchandising is a critical component of a regional mall's success. “In the mall business, merchandise mix is thought about rigorously, but in the neighborhood shopping centers, owners just didn't see the big deal,” he notes. “If a sharper look were taken at the tenant and merchandise mix, there might be opportunities to do a better job.”

How hard is it to align the uses and tenants? It takes considerable discipline, experts say. New Hyde Park, N.Y.-based Kimco Realty Corp. conducts what it calls a “void analysis” and Houston-based Weingarten Realty Investors creates a “tenant matrix” — both used to evaluate the area and determine what categories are missing.

Like Kimco and Weingarten, most large owners have a formal leasing process that involves both art and science. Technology plays an important part in analysis, with databases and spreadsheets the most commonly used tools, particularly when it comes to categories that are populated with national tenants. Experts stress that on-the-ground experience and familiarity with the market is critical in identifying local tenants.

Weingarten, for example, reckoned the neighborhood surrounding its Market at Town Center in Sugar Land, Texas, could use a large discount shoe store. After 12 months of hot pursuit, it landed DSW Shoe Warehouse as a tenant. In Albuquerque, N.M. the REIT brought in Borders Books & Music, Chico's, Ann Taylor Loft and White House|Black Market to complement its Whole Foods-anchored center. “The nature of the anchor [and the neighborhood] allowed us to bring in those upscale categories that were not filled,” says Patty Bender, senior vice president and director of leasing.

Rents vs. right mix

Rent shouldn't be the primary concern when considering tenants, says Edens & Avant's Jerome. “The way a center is merchandised is really a philosophical issue,” he says. Edens & Avant is willing to give up $2 or $3 a square foot in rent to get the right mix. “We're thinking about long-term value,” Jerome says.

Jeff Olson, Kimco president, says his company looks at merchandise mix before even considering rents. “Ideally, you want that center to serve the community, so you want a mix of all the categories so it can be a one-stop shop,” he says.

And at Weingarten, with many of the REIT's rents based on percentage sales, it pays to find the right mix to generate higher revenues. “Our reputation is at stake … and our tenants' and our bottom line is at stake,” Bender says.

Two trends are contributing to the changes at neighborhood centers.

For one thing, the number of categories suitable for neighborhood centers has shrunk in the past few years, dramatically changing the leasing landscape, notes Jay Sears, a principal with NewQuest Properties in Houston. In particular, the proliferation of big boxes has had a huge impact. Another example: Hallmark. “They used to be a staple in our centers” he says, “and now that they sell their cards through other mass merchants, the franchisees have dried up.”

One blossoming category is quick-serve food and fast-casual restaurants. “These concepts [like Pei Wei and Chipotle] have decided that they like the exposure they get in a grocery-anchored center,” Bender says. Equity One, too, often tries to differentiate its center through its outparcels. “The trend is to put the hottest restaurant on that pad to give it a bit of flair,” Anderson says.

Another growing area is service-oriented businesses. “We've clearly identified what kind of categories work in these centers, and now it's about service retail,” says Michael Carroll, executive vice president of real estate operations for New Plan Excel Realty Trust Inc. He cited spas, pack-and-mail stores, dentists, insurance offices and picture framers as examples.

The trend toward more differentiation in neighborhood centers is being led by REITs, but that's changing too.

Seth Layton, vice president of Tampa, Fla.-based RMC Property Group, which leases and manages 81 Florida shopping centers encompassing 8.1 million square feet, agrees. “Value is more than just NOI,” he says. “A compelling mix plus the best operators equals a superior product.”

Local flavor

While it may be more difficult for mom-an-pop retailers to find success in today's market, neighborhood center owners are continuing to seek them out. “For us, it's a balance” Jerome says. “If you have too many nationals, it becomes cookie cutter.”

Non-national tenants make up 30 percent of Regency Centers Corp.'s inline space portfolio. “The mom-and-pop tenant can make a real difference in the center and can set you apart,” claims John Delatour, Regency's Western region managing director.

In fact, many owners contend that local tenants are the only way to personalize a center for the community. “The concept of uniqueness would be out the window if there were no locals,” Carroll says.

But owners add that there's a lot more risk involved with mom-and-pop tenants.

“With mom-and-pops, you have both ends of the spectrum: an entrepreneur with a great amount of flair that can positively impact all his neighbors and the small business owner who just needs more experience,” Sears notes, adding that NewQuest Properties' criteria for small operators is getting tougher. “Sometimes you just have to roll the dice on them.”