WALNUT CREEK, CA-It used to be that department-store and big-box retailers ruled the shopping-center arena, but these days retailers of much smaller size are calling the shots with their landlords, according to Hans Lapping, an attorney and partner with Miller Starr Regalia here. Whether acting out of fear or a perceived advantage over developers, smaller retailers are acting like mini anchors, often using each other for mutual advantage by insisting on co-tenancies galore and making demands on landlords. The result: Landlords’ scrambling to meet these retailers’ demands in order to lease up shopping centers as the market recovers.
“The good news is that now there is deal flow again, as opposed to a couple of years ago when retailers put the kibosh on some deals,” Lapping tells GlobeSt.com. “While Target, Apple and other name-brand companies that frankly appear to be recession proof continued to do deals, most retailers stayed on the sidelines and didn’t expand much, based on the economy as a whole.”
However, says Lapping, in the last three to four months, there has been in increase in deal flow as retailers return to the marketplace and look to expand their existing footprint. But they haven’t forgotten their recent economic woes. “There’s still some trepidation on the part of the retailers. They don’t want to be the first one into a shopping center, and they don’t want to be the last one out.”
While retailers in general are committing to leases, they are insisting on co-tenancy protection both at the outset and throughout the term of the lease. Because of this, landlords are stuck between a rock and a hard place: if they refuse the co-tenancies, they are stuck with still-empty space, but if they agree to them, they leave themselves open to future tenant loss or reduced rents if they can’t fulfill their agreements. “It has become more challenging for landlords to lease up shopping centers and develop new ones,” says Lapping.
While landlords may not be able to avoid some co-tenancy agreements, Lapping advises resisting them as much as possible. In the event that they feel compelled to sign co-tenancies, he recommends narrowly defining the agreement’s terms to reduce risk and providing enough time to find replacement tenants so that they may fulfill the co-tenancy’s terms without losing existing tenants.
Lapping also suggests using “fish or cut bait” strategy. “If you don’t satisfy a co-tenancy within a certain amount of time or if a co-tenancy fails, you can offer reduced rent for a specific time period. After that time period’s expired, make your tenant make a decision: either terminate their lease or don’t, but they can’t go on a reduced rate forever.” Also include the stipulation that the failed co-tenancy must impact the existing tenant’s gross sales.
Another trend is national retail chains making some of the same demands as mall anchors used to make. “Co-tenancies have been around for years, but it used to be the anchor stores and more powerful retailers asking for them,” Lapping tells GlobeSt.com. “Now they have tenants who were previously not able to or simply didn’t ask for co-tenancy requirements in the past asking for them.”
Also new are lease-signing co-tenancies—where the landlord must prove to the tenant at lease signing that he has signed with specific other tenants—and possession co-tenancies, where they must show a certain amount of square feet has been rented before the tenant needs to begin construction or build out. “They do this as a mechanism to protect themselves, but landlords are struggling more to make sure they’re lined up appropriately,” says Laping. “They also may have financing issues, so it’s complicated right now.”
While most of these landlord/tenant issues can be solved through negotiation, some can’t be, and owners may be forced to pick their horse early on. If they can’t get two similar retailers to sign in the same center, they may have to choose the one that would be the best draw for their customer base.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
