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Power Shift: Retailers Push Landlords for Better Deals

Retailers may be faltering and closing stores, but in negotiations with developers they’re gaining ground.

Unlike many other malls nationwide losing tenants, Beverly Center in Los Angeles remains “close to capacity” according to owner Taubman Centers.

Retailers may be faltering and closing stores, but in negotiations with developers they’re gaining ground.

This story first appeared in the December 29, 2008 issue of WWD.  Subscribe Today.

The shift was noticeable at the International Council for Shopping Centers New York Dealmaking Convention earlier this month, where, traditionally, landlords had the upper hand. Not so much anymore.

“There are retailers asking for concessions. No two ways around it,” said Malachy Kavanagh, spokesman for the ICSC. “From a developer’s standpoint, you’ve got to balance who really needs a concession versus people asking because now is the time to ask. A retailer may not be doing bad, but is seeking it anyway.”

“Retailers are asking for tougher deals, putting pressure on retail rents,” said Daniel B. Hurwitz, president and chief operating officer, Developers Diversified Realty, one of the nation’s largest owners and operators of community centers, lifestyle centers, enclosed malls and other properties. “The full effects of the economy have yet to be felt.”

“Midtier folks with acceptable financial positions may seek some limited rent relief,” affecting a small percentage of the store base, said John Bemis, executive vice president, director of leasing and development, Jones Lang Lasalle, which specializes in real estate services and investment management. He cited one instance where a major specialty chain, after a real estate portfolio review, got at least one landlord to lower rents from $22 or $23 a foot to $15 in several locations.

With the recession deepening and the pipeline for new projects virtually empty, concessions to retailers on rents, build-outs and termination rights, where retailers can get out of a lease based on sales levels, were front and center at the convention. Three years ago, 10-year leases were the standard. Now it’s not unusual to sign two- to five-year leases. The length of the lease deal cycle has almost doubled, from 60 to 90 days to 120 to 180 days, because retailers are getting more demanding, requiring longer negotiations. Significant changes in the substance and length of talks between stores and landlords have been noticed since last summer, developers said.

With retailers counting every penny and closing stores, landlords are showing some flexibility. They don’t want to lose more tenants than they’ve already lost, and are intent on shoring up their existing properties since new ones aren’t being developed. There were even cases where retailers sign leases and have an option to wait a year to move in, conceivably when the economy improves.

“There is no rule of thumb,” said Bemis. “In a center that is 100 percent leased and doing $500 a foot, [the landlord] may want to take that space back,” rather than renegotiate to a lower rent. Sources at the convention said many chains are asking for concessions, among them Zale, Sterling, Gap, American Eagle, Limited, Talbots, Chico’s, Loft, Goody’s and Stein Mart. Attendance at the event was down this year to 6,700, from 7,200 last year, ICSC said.

According to Hurwitz, there will be pressure on occupancy rates for the next 12 to 18 months. “There are two scenarios, both of which will lead to occupancy declines — more store closings and it will take longer to fill the space.”

He said Diversified had about a 95 percent occupancy rate at the end of the third quarter this year, compared with a 97 percent occupancy at the end of the fourth quarter in 2007. The company projects a 150 to 200 basis point decline in the first half and then sees the rate starting to climb back up in the second half.

Diversified, said Hurwitz, has accelerated lease renewal efforts to counter the declining occupancy rate.

“There continues to be enormous pressure on moderate to better women’s ready-to-wear at the department store and specialty store level,” Hurwitz said.

However, “landlords aren’t giving in as quickly as most retailers would like to see.”

“Obviously we want to see our tenants do better,” said Frank Castagna, principal of Castagna Realty Co. Inc. and owner of the Americana Manhasset luxury center on Long Island. “We are really looking at how to help, where can you reduce operating costs, such as in advertising and marketing, cutting electric costs — how you can pass benefits to improve their margins. As far as renegotiating [rents], we don’t have any of those problems, as long as we can maintain sales.” He said the Americana in 2007 generated $1,430 a square foot, and should be 5 to 7 percent up in 2008. “The key luxury players have held their numbers,” Castagna said. “They are still in the black, and not in negative territory, with few exceptions.”

“The important thing is that we signed a lease in this environment,” said Gary Trock, senior vice president of retail services at CB Richard Ellis, the broker who worked on getting J. Crew to take a 4,600-square-foot space on 14 Main Street in East Hampton, N.Y. “We are absolutely seeing rents soften. In the heat of the negotiations, landlords are giving a little better concessions.”

What’s troubling, said Trock, is that “we lost our pipeline,” referring to the dearth of retail projects on the horizon. “We don’t know what will happen in six months.”

“The majors only sent a small portion of their leasing agents” to ICSC, said Jeffrey C. Paisner, a retail broker at Ripco. “Developers that were overleveraged can’t get financing. Projects like River Oaks in Houston, the Streets of Buckhead in Atlanta and the Eschelon in Las Vegas are on hold. There are price reductions for Manhattan rents. Eighty-percent of the landlord reps are sending e-mails about rent reductions. Even mall developers that have vacant space are talking about [renting in-line space] to pop-up stores.”

Not all landlords are reducing rents, at least for now. As Alan Victor, executive vice president of Lansco, indicated, “Friedland Realty [which has properties on Madison Avenue] is not budging because it feels that if it lowers the rent on one property, it will have a negative effect on the others. But that is the exception.”

Dan Pisark, vice president of retail services for the 34th Street Partnership and the Bryant Park Corporation, suggested there were friendly conversations at the convention but wondered how many would lead to deals. “There’s a lot of space on the market, including the Banana Republic store on West 34th Street,” he said, noting that the retailer has renewed its lease for one more year.

Gary Alterman, senior vice president of Robert K. Futterman & Assoc., said, “Some landlords are making concessions but retailers are holding off [on committing to leases] to see if things get worse and rents go down. Rents are not softening on A locations on Fifth Avenue, in SoHo and in Times Square. Did they soften on Third Avenue north of Bloomingdale’s? Probably. There’s a lot of space available. We’ll see rents soften on Wall Street where they had skyrocketed [prior to the economic downturn].”

However, across the country, generally, “Landlords were much more willing to cooperate in order to make deals. It looked like the wind had been knocked out of their sails,” said Steve Greenberg, president of the Greenberg Group retail real estate advisers. “In the past, the big five — Simon, Macerich, Westfield, General Growth and Taubman — were somewhat like bullies. Certainly today the playing field has shifted. The leverage has gone over to the tenant side. My clients and I are actually benefiting from what’s going on. We’re trying to negotiate very favorable deals,” Greenberg said, citing Lacoste, Façonnable and Vince, a division of Kellwood Co., as among his clients seeking locations. “They’re all sitting on healthy balance sheets, but being prudent, conservative and careful. We are still making deals. Not all retailers are in a cash crunch.”

“Occupancy rates have plummeted, particularly in B and C level, older malls and strip centers. In some malls, store occupancy rates are falling below 75 percent,” said Isaac Lagnado, president of Tactical Retail Solutions. “Ironically, the most credit-worthy tenants, the anchor department stores like Macy’s or J.C. Penney, or category killers like Best Buy, are the ones that pay the lowest rent, or sometimes no rent. The national speciality chains like Gap or Limited also have a good deal of clout and pay considerably less as a percentage of revenue than the one- to five-unit local operator or even regional retailers. Malls make their money on these smaller players, where the combination of fixed rent and percent rent plus various assessments [utilities, common area maintenance charges, taxes, etc.] can exceed 15 percent of sales even rising to almost 20 percent, rivaled only by payroll costs as nonmerchandise expense items. In a violent downturn such as now, this is an unsustainable expense level for small stores. The upshot of this is an increasing level of delinquency on rent bills — delays and sometimes outright nonpayment or partial payment.”