There's nothing like a crisis to bring people together.
With more and more retailers shuttering locations, filing for bankruptcy protection or reining in expansion plans, landlords are putting more emphasis than ever on doing what they can to keep a grip on existing tenants — especially those that are candidates for shutting down.
Proactive landlords are not just offering rent reductions — a common request from troubled retailers — but they also point to increasing marketing efforts, speeding through renovations and doing whatever they can to keep traffic up. They are doing this, in some cases, even before there's a sign that a tenant may need help.
“We have to recognize that we're all in this together,” says Joseph Coradino, president of both PREIT Services LLC and PREIT-Rubin Inc., the companies that handle leasing and redevelopment for Philadelphia-based regional mall owner Pennsylvania REIT (PREIT). “Getting through a difficult environment like this requires a partnership — that's the foundation for the discussions.”
But because it requires that owners share the pain, rent relief ranks among the least appealing options on the table. As a sign of the subject's touchiness, several owners declined to discuss the matter with Retail Traffic. When asked how much relief PREIT has negotiated since the economy began going south, Coradino replies, “Too much,” with a laugh.
Like most owners and managers, PREIT evaluates each request for rent relief on a case-by-case basis, examining a range of factors to determine whether the relief would aid the tenant in question or amount to throwing money at a lost cause. Such factors can include credit checks, assessment of inventory levels and more.
PREIT sizes up the performance of other tenants in the same center, Coradino says, and also scrutinizes the tenant's history in the location. “We're trying to find out if the tenant is viable. Do they have a positive track record? Have they done business consistently, and is this just a blip?” he asks.
In some cases, factors such as a recent personnel change may be behind a decline in business, rather than larger market trends. “You can tell the difference when a retailer has a good manager in place in their store,” Coradino says.
An accurate assessment of a tenant's finances hinges on honesty and transparency regarding their status, says Mitch Salmon, senior vice president of New York City-based Mall Properties Inc. This can be difficult to attain, however. Larger companies can be slow to authorize sharing of financial, Salmon says, while smaller ones are often private and may provide information that is less trustworthy.
“You really have to understand how they go about getting their merchandise,” Salmon says. “That's a very important component.” Also significant is a tenant's standing with lenders. Those unable to borrow “are not worth negotiating with,” he says.
Landlords confronted with the possible loss of a big-box tenant — the “Linens 'n Things of the world,” as Salmon says — may face an especially dicey situation. Replacing such tenants presents a challenge because relatively few retailers are able to occupy such large spaces. And losing one can start a landlord down a “slippery slope,” with neighboring tenants taking a hit after the big anchor drifts away, Salmon says.
Furthermore, by not doing anything to help a potentially troubled tenant, owners leave themselves open to “midnight moves” — that is, when a tenant takes matters into their own hands and disappears without warning in the dark of night. Big national tenants rarely do this sort of thing. But regional and local mom-and-pop retailers do sometimes do this to escape leases. Columbia, S.C.-based Edens & Avant, for example, says it has lost a handful of tenants in midnight moves earlier this year in Florida, a state hit particularly hard by the subprime mortgage collapse. But such moves have since declined, according to the company.
The most appealing option
An owner's past relationship with a tenant can bear on decisions regarding rent relief, as well as the tenant's line of business and its standing in the current market. Edens & Avant shies away from reducing rent for tenants whose fortunes are tied to the housing market, such as mortgage brokerages, says CEO Terry Brown.
Hardware or home furnishing stores likewise are less likely candidates for relief in the current economic environment, Brown says. Meanwhile, restaurants with strong track records at Edens & Avant properties stand out as better qualified for aid, he says. Some may be struggling as consumers eat out less because of inflation in food and gas prices. But that trend may turn around and, when it does, it is beneficial to have proven operators already in place.
North Plainfield, N.J.-based Levin Management Corp. assigns rent relief requests to an internal committee established even prior to the recent economic downturn. This committee includes leasing agents, property managers — who are valued for their close relationships with tenants — and other stakeholders, says Matt Harding, president. The committee asks the tenant for sales information, reviews the situation and recommends action to the corporation's senior management. The company generally grants relief over a yearlong term, reducing rates by as much as 15 percent during that time.
For a landlord entertaining a request for relief, deferring rent payments is the most desirable resolution, as it extends a guarantee that the discounted rent will be recovered in the future.
Levin has granted relief to four or five tenants this year, Harding says. That's more than in recent years when retail was humming and virtually no one needed relief. To put it in perspective, however, those tenants represent just a tiny fraction of the more than 1,000 tenants within Levin's portfolio of centers in Virginia, Pennsylvania, New York, New Jersey and North Carolina.
Besides outright rent reductions, there are other ways landlords can lessen a tenant's financial burden. For example, owners and managers can give tenants leeway by easing payments on common area maintenance (CAM) charges. These fees can vary market by market depending on factors such as the climate, whether the center is open-air or enclosed and what sorts of services and maintenance is required. Regardless of the costs at a specific center, Levin will work with tenants to soften the effect of high CAM costs by allowing tenants with strong payment histories to pay fees over several months, rather than in a single lump sum.
If financial assistance isn't enough, landlords can consider a more drastic option in helping tenants. For some stores, it might be appropriate to allow them to subdivide their space to bring in a joint tenant, according to Mall Properties' Salmon. Few retailers qualify for this option, however. “Very often, you find yourself in a position of all or nothing, unless you're dealing with a very large tenant who has a lot of frontage,” Salmon says.
Valets and “ambassadors”
Other strategies landlords can adopt to help tenants through hard times amount to simply doing more of what they always do: drawing shoppers with promotions, site improvements and special events. When the economy suffers, these efforts may take on added importance.
Owners cite upkeep and redevelopment as priorities, such as renovating facades, improving lighting and enhancing landscaping in common areas. Some are finding new uses for these common areas to draw shoppers. PREIT has renovated Voorhees Town Center in Voorhees, N.J., formerly Echelon Mall, by demolishing half the site and replacing it with a mixed-use “town center.” The new site features a dog park as an added draw for foot traffic.
Phoenix-based Vestar, meanwhile, has launched a series of weekly concerts to draw more shoppers to its properties, featuring harp music, acoustic performers, alternative acts and tie-ins with Radio Disney.
Vestar promotes the events on its Web sites, with signage throughout its properties and via print and radio media partners, says Denise Hart, vice president of marketing. “We've been extremely successful with them — they bring a huge amount of traffic and garner a lot of media attention,” she says. “It's exciting.” Vestar has also turned temporary spaces into art galleries to increase traffic.
Levin Management has screened outdoor movies at its centers and tried out other promotions as well. The company capitalized on another economic crunch — rising fuel prices — by giving away gas cards at Capitol Plaza in Ewing, N.J.
To increase traffic and keep centers busier at night, Levin has sought to build restaurants and add pad sites to properties. Municipalities have proven supportive of pad-site development and have reduced parking requirements to aid the growth, says Harding of Levin Management.
Similarly, the opening of a host of new restaurants at PREIT's Plymouth Meeting Mall — P.F. Chang's, Redstone Grill, Dave and Buster's andPizza Kitchen — spurred a promotional campaign financed by the owner and aimed at nearby office workers, who received offers of discounts and freebies.
“We'll do the same sort of thing for tenants who are struggling,” PREIT's Coradino says. “We're focused on trying to find ways to drive traffic and sales to retailers that are going through a difficult time.” Another promotional campaign focused on an Irish pub, where the owner targeted male visitors in an attempt to bring them to the bar for Monday night football showings.
Visitors to Plymouth Meeting will notice a few other gambits PREIT has deployed, such as its new valet-parking program. Valets recently parked 500 cars in a week, including a Ferrari and a Maserati — which suggests to Coradino that the program is achieving its goal of drawing customers with money to spend at the mall's retail outlets.
“It's our first-ever,” he says of the program. “That's driving the right kind of customer to the property.”
After leaving their cars in a valet's care, Plymouth Meeting shoppers who stop to study a mall directory might find themselves approached by security guards. Not to worry — the guards have been retrained for double duty as friendly “ambassadors.” PREIT now pays more for what Coradino calls a “higher caliber” of security guards, who are trained to help shoppers who need directions or are lugging around heavy loads of packages.
“Our business has really changed dramatically,” Coradino says of his company's efforts. “We've got to really step outside the box and be more than just a place to shop.”