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Empty mall space helps stores with rent
Few shoppers walk through Randhurst Shopping Mall in Mount Prospect, Illinois.
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Kai Ryssdal: We've all heard how bad this economy's been for retailers. It was the worst holiday season in decades, right? Well there's a whole chain of things that happens once consumers stop spending, and it starts with the physical retail space itself. A survey out today from the real estate research firm Reis says vacancies at malls and shopping centers are approaching a 10-year high. The sight of a darkened storefront does nothing to attract foot traffic, of course, so landlords are eager to keep as many tenants as they possibly can. And that is putting retailers in a pretty decent negotiating position. Ashley Milne-Tyte reports.
Ashley Milne-Tyte: Jonathan Plotkin is a partner with real estate developer The Jaffe Companies in Illinois. One of their properties is a strip mall in the Chicago suburbs. Plotkin recently got a call from a national retailer who occupies a third of the space. The retailer told him they were closing stores all over the country.
Jonathan Plotkin: And that this one was on the list to be cut unless they could figure out how to operate more profitably there in a declining market. Well one way is to cut your costs, i.e. rent.
Retailer and landlord did a deal and the store stayed -- paying 15 percent less rent than before. Bryan Eshelman of Alix Partners helps worried retailers avoid the slide into bankruptcy. He says when banks won't negotiate, landlords are an obvious next step.
Bryan Eshelman: Many retailers with whom we're working, we are advising to do this quickly, because our feeling is that the first companies that do ask for concessions have a better chance of getting them.
Even if they don't strictly speaking need the break. Real estate developer Jonathan Plotkin again:
Plotkin: I had a conversation with a director of real estate from a national chain, who told me, that they had a mandate come down -- and they're very successful -- from, you know, management, saying that whatever deal that you're working on right now, cut the rent by 20 percent.
He says retailers definitely have landlords over a barrel. But he'd rather give ground on rent than lose a tenant that helps keep the entire mall busy.
In New York I'm Ashley Milne-Tyte for Marketplace.
I lost my business in Sedona, because of high rents in the location where I had my coffeehouse-cafe'. There are many business in this city that have experienced the same thing and have had to close. My landlord, who has owned the location for nearly twenty years, where I rented, would did not reduce any rents. I explained that my sales had dropped 47%, I could not get a loan on my house, and even though my bank loan was paid on time; there was no consideration for an extension for a higher line of credit. Now, I am being sued. I have lost everything. What an American Dream!
Shopping center landlords are indeed reducing rents, but there are a few mitigating circumstances. 1 - with financing for new development now very costly when it is available at all, many planned new centers are not being built. So retailers who are expanding (and there are still some who are) have fewer choices. Those who signed leases at these planned new properties are looking to existing centers, helping to keep vacancy rates lower than they otherwise would be. 2 - Owners of older properties, who have little or no debt, can more easily afford to offer lower rents. Rents at many of these properties have been escalating for some time, and the owners are way ahead of the game compared to the owners of newer centers, who usually are carrying a ton of debt. The ones being squeezed the most are probably those who purchased centers at the historically high prices of the cycle now ended, but whose income projections are now the furthest off. They cannot get the rents and escalations they originally predicted. They can't sell, because there are so few buyers, and because the ones who are buying are offering lowball prices. There are lots of institutional owners in this squeeze. And the prediction is for 200,000 more store closings in 2009. It's an interesting time in the retail real estate sector. FYI, I am the corporate director of marketing for Levin Management Corporation (www.levinmgt.com), which manages over 12,000,000 square feet of retail in BY, NJ, PA, VA and NC.
The centers built most recently are still paying off a lot of debt, and if they
