In the face of limited demand from national chains, many retail landlords and managers are taking a closer look at start-up businesses.

The combination of widespread unemployment and falling retail rents has made this an attractive time for those with interest in retail to launch new concepts, industry sources say. But many of the entrepreneurs have limited experience in opening and operating stores. In order to help them succeed and limit their own risk exposure, many landlords have developed tenant incubator programs, which allow new start-ups to sign short-term, flexible leases at affordable rents and receive feedback on operations and marketing.

For example, Madison Marquette, a Washington, D.C.-based retail owner and developer with a 23-million-square-foot portfolio, has set aside space in its 868,000-square-foot Bayfair Center in San Leandro, Calif. for new start-ups. When the firm finds a new tenant that seems to have potential, it brings the business into the center on a temporary licensing agreement that typically lasts from a few months to a year to gauge its performance before signing a permanent lease.

Meanwhile, Levin Management Corp., a Plainfield, N.J.-based real estate services firm with 12.3 million square feet of retail under management, has set up business incubator programs at its 163,261-square-foot Hickory Plaza property in Hickory, N.C. and at its 227,000-square-foot Liberty Center in Erie, Pa., to fill vacant in-line space. And Jones Lang LaSalle Retail, an Atlanta-based third party manager with a 79.5-million-square-foot U.S. portfolio, has been incubating tenants throughout its centers, including the Bel Air Mall in Mobile, Ala., Greenville Mall in Greenville, N.C. and Westland Mall in Westland, Mich.

The space used for incubator programs is typically a fully built out store left over from a previous tenant, which helps both the new tenant and the landlord save money on construction costs, says Eric Hohmann, managing director of property investment with Madison Marquette. To ensure maximum exposure, Gregg Katz, a tenant representative and consultant with the Shopping Center Group, an Atlanta-based retail real estate services firm, recommends that landlords place start-ups in highly visible locations that generate a lot of foot traffic.

“There will be no second location if the first one is not right,” he says. “If you are tucked into a corner in a C location, your chances of success are a lot less.”

When business was booming landlords would often charge independent retailers higher rents than their national counterparts. But today’s entrepreneurs have gotten more sophisticated about rent negotiations, says John Bemis, executive vice president and director of leasing with Jones Lang LaSalle. As a result, “incubator” tenants now pay what Levin Management describes as “entry-level” rents.

In an incubator scenario, a center’s management can monitor a tenant’s operations closely during the initial licensing period. During this time, it may provide strategy tips, including marketing techniques, how to design a compelling window display and how to protect against theft, says Bemis. One measure of a successful start-up is whether the business shows steady sales growth throughout the year. If it is successful, the landlord may then offer a long-term lease, although it might still be shorter than what is presented to a national tenants. A lease with a national chain typically has a 10-year term, Bemis says. With a start-up, Jones Lang LaSalle would likely sign a five-year agreement.

“You are going to look at their sales and at what level they are at; are they in a growth mode or have they remained relatively flat throughout the introduction period?” Bemis notes. “It’s really looking for a good, solid, upward trend in sales as compared to the mall [in general] and the category they operate in.”

Last year, Jones Lang switched a number of incubator “graduates” to permanent leases. Among the success stories is Tokyo Café, a Japanese restaurant at Greenville Mall; Polish, a women’s apparel and accessories boutique at Bel Air Mall; and Pretty Eyes, a threading salon at Westland Mall.

Meanwhile, Madison Marquette is considering signing a permanent lease with a current incubator tenant at Bayfair Center. The tenant is a barbershop that has been so popular with local customers it’s turned into a place to hang out, says Whitney Livingston, regional director of marketing with Madison Marquette.

“It’s a couple of gentlemen with a young, hip barbershop and it’s thriving,” she notes. “They have cool graffiti [design] on the storefront, they have flat screen TVs. They have never done this before, but they’ve been very successful.”

—Elaine Misonzhnik