Pressing restart on the tenant mix

Terminating leases may seem counter-productive from a landlord’s viewpoint. And yet many U.S. shopping center owners are actually managing to boost rents and property values by moving tenants out, rejuvenating properties and bringing in a more lucrative tenant mix. Thus the growing practice of “deleasing” — as this type of lease-termination activity is being called.

Rouse Properties used deleasing to transform an underproductive enclosed shopping center in Eugene, Ore., into a thriving open-air power center called the Shoppes at Gateway. This $45 million project required recapturing space, coordinating renovations with the anchor tenants and even moving some retailers into temporary digs while exterior-facing boxes and outparcels got built. Rouse
identified shopper demand for the power center but needed cooperation from the anchors and buy-in from those tenants strong enough to fit the landlord’s vision for a new lineup. “We went out with a very rough plan to a number of tenants and put together a plan that surpassed all expectations,” said Rouse COO Brian Harper.

The Shoppes at Gateway opened in the fourth quarter with some retailers new to the market, of which Hobby Lobby, Marshalls, Maurices and Panera are only some. Noodles & Company and Firehouse Subs are slated to open there this year. Occupancy is 95 percent, up from 85 percent before the conversion.

“Retailers are the artists, and we’re the venue,” Harper said, emphasizing the tenant’s role in revitalizing retail properties. “We try to build the best and largest mousetrap, and that means going to the retailers first and getting them on board.” Of the retailers that stayed on through reconstruction, some are experiencing two to three times the sales volume they were achieving before the change, Harper says.

Landlords delease in order to address a range of challenges, from demographic and consumer trends to new competition and property obsolescence, says Roy Williams, chief investment officer at PECO Real Estate Partners, (a spinoff of Phillips Edison & Co., of which it was the strategic investment and net-lease division). “Assuming the property is still a viable retail location, the driver in a deleasing program is leasing — the tenant merchandising plan,” Williams said. “We call this process ‘rightsizing,’ or bringing the retail current to meet the demands of the marketplace.” Retailers at a faltering property are often eager to renegotiate a lease if it will improve sales, Williams says. Whether a landlord seeks to retain a given tenant or take back space to bring in a new retailer depends on that landlord’s leasing goals.

PECO Real Estate is redeveloping a former enclosed mall and strip center on a single property in Parma, Ohio, into The Shoppes at Parma. This revitalized project comprises a JCPenney-anchored strip center, a power center and several free-standing stores. The reconfiguration creates several smaller boxes and outparcels to fit retailer demand. Moving a Dick’s Sporting Goods from the mall site to the strip center enabled the developer to make way for an expansion by Walmart. Working with the anchors is essential in de-leasing, says Williams. “Anchors generally have control of their space,” he said, “so it’s critical going in that you present a plan to your anchors and have their buy-in and support.”

Adding anchors and space can boost a shopping center’s drawing power, according to John Hendrickson, COO of Ramco-Gershenson Properties Trust. At Town & Country Crossing, a 282,000-square-foot shopping center outside
St. Louis, the landlord expanded a line of stores by constructing a 31,000-square-foot box it then leased to Stein Mart, which joins Whole Foods and Target as an anchor. “An important part of retail for the future is to have dominant assets that are multianchored, not relying on just one draw but with multiple draws,” Hendrickson said. “Anytime we can make a stronger property, we’re going to do that.”

Deleasing is ongoing for Kite Realty Group Trust, which is investing some $120 million to redevelop 20 neighborhood and community shopping centers. At the end of last year, the Indianapolis-based REIT owned interests in 23.6 million square feet of space across 118 U.S. properties, with three additional projects under development. The capital that Kite spends to reposition, redevelop or repurpose shopping centers generates returns of between 9 and 11 percent, says Maggie Daniels, the company’s director of investor relations and strategy. Few new construction opportunities in today’s market can compete with those returns, she says. “With the historically low supply, a lot of REITs are looking to redevelop their existing portfolios to generate a return,” said Daniels. Recapturing space temporarily brings down rental income but rewards the landlord post-reconstruction with a revitalized property that commands higher rents and helps tenants boost sales. “The improvement needs to be income-producing, not just aesthetics,” Daniels said. Kite will turn its deleasing and revitalization attention to more of its properties as it completes the projects now under redevelopment. “We anticipate having a continuous pipeline of about $100 million in redevelopment,” said Daniels.

Today’s retailer preference for small stores is driving much of the current deleasing trend, observes Greg Maloney, president and CEO of JLL Americas Retail. “The retailer will come to us and say, maybe, they are in 8,000 square feet and would be happy and do the same sales volume in 4,000 square feet,” said Maloney. JLL approaches deleasing like a game of chess, Maloney says, planning each move as a setup for the next and limiting disruption. He advocates phased renovations to minimize construction concerns. “You don’t want to tear down a whole section and then have barricades, noise and dust,” he said. JLL has used specialty leasing such as pop-up stores to shield demolition or construction from view. By the same token, a temporary tenant can generate income and draw customers until a permanent tenant is ready to move in. “A temporary tenant like a pop-up store can absolutely add some vibrancy to a mall,” said Maloney.

Brixmor Property Group seized an opportunity by buying back three New York–area leases from the A&P grocery chain, which filed for bankruptcy protection in July 2015 and announced plans to close some 120 stores. The three deleased stores were paying less than $10 per square foot in rent and had several years remaining on their leases.

Rather than allow a new owner to take the A&P stores in its properties, Brixmor recaptured the spaces to bring in anchor tenants of its own choosing. One of those is Asian-American supermarket chain H Mart, which is set to open a 41,800-square-foot store in the fourth quarter of this year in a former Pathmark (A&P) space that anchors Highridge Plaza, a Brixmor shopping center in Yonkers, N.Y. Grocery chain H Mart’s rent of approximately $20 per square foot should more than make up for the downtime and the renovation expense on the space, says Brian Finnegan, Brixmor’s executive vice president of leasing. Finnegan says he expects that all three former A&P spaces will rent for three to four times the previous rates.

Brixmor is about halfway through what it terms the “transformational leasing” of 190 properties it identified last October as ripe for deleasing, upgrades and retenanting. “Landlords around the country are recognizing that the short-term pain associated with this is minor,” said Finnegan, “compared to the long-term benefit to the shopping center.”