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Leases are ending sooner as landlords innovate

November 30, 2017

Retail product cycles are not the only shrinking index in the shifting shopping center landscape. Leases, too, are getting condensed, as those old 20-year anchor store terms are increasingly replaced by a succession of smaller, more-abbreviated leases.

In 1992 the typical retail lease was a two-decade term; today it is about five years, according to research by Appear Here, a London-based company that books short-term retail deals in shopping centers and street-side spaces. And retailers, for their part, have themselves been pushing for shorter lease renewals of late, terms of only a year or two, down from five to 10 years previously, according to Andrew Graiser, head of A&G Realty Partners.

While the trend creates fiscal uncertainties for retail property owners, it also gives shopping centers more flexibility at a time when quick responses to fast-changing retail tastes are a key to survival, says Chase Welles, a partner at the New York City office of the Atlanta-based Shopping Center Group advisory firm. Leasing for 2017 and 2018 is a “totally different world from a decade ago,” said Welles. “Owners are looking for retailers who drive traffic — appropriate traffic, that is — and worrying about the economics secondly.”

What has long existed at malls as a specialty leasing program for carts and seasonal tenants has become an increasingly active, diverse business practice, observes Melina Cordero, CBRE’s head of retail research for the Americas. “Now the shift is to temporary tenants,” she said. “The landlord is thinking, ‘I can leverage the pop up to create buzz and interest.’”

Look for even more pop-ups and short-term leases going forward, says Holly Rome, director of national retail leasing for third-party mall manager JLL. “We have heard tenants say that they are unsure of their future — we hear the hesitancy in their voices,” she said. “They don’t want that risk of being locked into a lease.”

“Owners are looking for retailers who drive traffic — appropriate traffic, that is — and worrying about the economics secondly.”

One of the pros to this proliferation of short-term leases is their role in adding luster and net operating income to previously underutilized spaces, says Suzanne Cayley, CLS, SLD, vice president of specialty leasing at Montréal-based Aurora Realty Consultants. Such short-termers include online sellers, new brands and startups, and even established retailers testing new products. These spaces also provide valuable feedback that enables merchants to bridge their temporary stints to a permanent concept, supporting longer-term lease programs at centers, Cayley says. “These retailers and brands are compelling us to rethink the way that we are conducting business.”

With restaurants, entertainment tenants and clusters of stores replacing traditional anchors, landlords are pushing to eliminate or minimize lease co-tenancy clauses, which allow retailers to break leases or pay reduced rents when center anchors depart, says Garrick Brown, Cushman & Wakefield’s vice president of retail research for the Americas. “Most tenants have been willing to close deals without co-tenancy [clauses], but they are generally asking [for], and usually getting, something else in exchange, such as modest increases in tenant improvement budgets or more-flexible renewal terms.” When co-tenant clauses do get included, they often allow stores to sublease spaces or convert to percentage rents in the event that a change in the center’s mix adversely affects sales. But in centers where tenant demand is strongest, said Brown, “most retailers haven’t been militant on the co-tenant issue, because I think they understand these clauses are something landlords simply aren’t going to be able to offer in the future.”

Tenants, however, are increasingly trying to negotiate for kick-out clauses that allow them to exit the center mid-lease-term — at a five-year kick-out point on a 10-year lease, for example, according to Rome. “If a retailer isn’t performing, then they aren’t stuck in the lease, and if they aren’t performing, the landlord doesn’t really want them in the center anyway,” she said. Though Rome typically seeks kick-out provisions for both landlord and tenant, it is the tenants that are more apt to win that lease concession exclusively these days, she says.

“If a retailer isn’t performing, then they aren’t stuck in the lease, and if they aren’t performing, the landlord doesn’t really want them in the center anyway”

Early kick-out clauses can be problematic for landlords because they tend to limit the center’s ability to finance or refinance, says Jason Baker, a partner at Houston-based Baker Katz. “So landlords are forced to book a 10-year lease with a five-year kick-out as a five-year lease.”

Developers are starting to create permanent spaces specifically for pop-ups and other short-term tenants, in part to reduce tenant build-out and infrastructural costs. Last month Simon introduced a 3,500-square-foot permanent pop-up home called The Edit@Roosevelt Field, at its Roosevelt Field mall, in Garden City, N.Y. This offers a platform for both upstart and established brands to showcase new products that rotate through the center, the firm says. Simon is working with Appear Here, which plans a robust U.S. expansion after operating primarily overseas, to recruit the best-suited tenants. Other malls have adopted similar tenant-finding services. JLL has established a companywide initiative to identify independent and organic brands and to determine which merchants are looking to lease outside their home markets, says Rome.

National retailers are also using temp spaces as part of their expansion plans, especially when sizing up a market, Rome says. “It’s a way for them to grow their footprints and create a buzz without the big investment,” she said. For the sake of customer perception, national retailers must make it clear that such short-term spaces do not fully reflect their existing brands. “This can create a negative perception when customers don’t see the presentation or selection they’re accustomed to,” she said. Not all center tenants are suited for shorter leases, because many require longer gestation periods and more time to recover necessary costs.

Some center owners with dedicated pop-up spaces have been almost too successful with them, says Baker. One of his landlord clients created a retail-incubator section in his Houston-area center and quickly found himself with more demand than space; several popular new tenants that wanted to remain in place could not, because of a space crunch. “The problem for these retailers is they often have no choice but to move out of spaces where the customer is used to patronizing,” Baker said. That can cause customers to believe that there is a problem with the center itself, he notes.

In another emerging trend, some trophy mall landlords are leveraging their ‘A’ properties by offering retailers spaces there only if they renew leases in the landlord’s less compelling centers, Brown says. “If it’s an issue of a five-year renewal on a store that you as a retailer had planned to close because sales were flat or just slightly negative, then such a deal might make sense to get your banner in a trophy project,” said Brown, who predicts that such bifurcation tactics “will become one of the major retail stories of the next few years.”

“It’s a way for them to grow their footprints and create a buzz without the big investment”

Typical mall deals for national retailers now range from five to 10 years, say Cayley, though 15- or even 20-year deals are still being done for high-demand restaurant concepts. Leases for large, single-purveyor food halls such as Eataly are still typically long-term in the few ‘A’ centers where they exist, she says. “But I think we will start seeing more class-B landlords attempt to develop quality food halls in their centers eventually, and then maybe we will see more flexibility with terms.”

Though national retailer expansion platforms are flat or down, “we are seeing the big surge with independents and organic retailers,” said Todd Caruso, CBRE’s senior managing director of retail advisory and transaction services for the Americas. “The concept of incubation is going to be far more prevalent in the next couple of years.” To fit into incubator spaces, some national retailers are unveiling satellite concepts that have an “indie” feel, with minimal tenant-improvement dollars on month-to-month or six-month leases, Caruso says. The new leasing model is forcing lenders to rethink old “credit versus cool” calculations, he says.

Not only are leases shorter these days, they are also getting done faster, says Elizabeth Layne, Appear Here’s chief marketing officer. With Appear Here’s temporary tenants, it takes about three to six days to book a space, and many deals take only 48 hours to close, says Layne. “Retail is becoming more tangible, things are becoming more short-term, there are less hoops to jump through, and leasing itself is slowly but surely being redefined,” Layne summarized.

While national tenants still pay the brunt of the bills at centers, “we are finding that consumers like authenticity and variety,” Caruso said.

Layne concurs. Retail is becoming like “a media channel for discovery,” she said, and shorter lease lengths reflect a push to bring in edgier tenants.

“To keep retail experiences interesting,” said Layne, “landlords will really need to start thinking about curating their spaces with brands that connect to their audience.”

By Steve McLinden

Contributor, Commerce + Communities Today

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