David Simon Talks Holiday Shopping and GGP
Tags: Black Friday, General Growth Properties, Simon Property Group Posted in
Shopping Center Rent Concessions: What’s it all about?
There is a lot of talk about rent relief and rent concessions in the current environment and how this is impacting shopping center landlords and publicly traded REITs. Hardly a day goes by without another article or news report talking about retail tenants asking for and in some cases getting rent relief. Is this happening? In fact it is happening. It is completely a function of the local market situation, the particular tenant and the level of pain for the landlord (or lender in some cases). Is it widespread? No, it is not. Some landlords who are strapped themselves are telling tenants to pound salt. While retail sales are down almost everywhere, quality shopping centers and malls won’t even consider rent relief. Consider a typical A class mall with pre-recession sales of $500 PSF. If sales are down 10% right now from peak to trough, the average sales $PSF is still $450 and tenants are absorbing some of the resulting higher occupancy costs and also dealing with it by cutting expenses. There was a great deal of “fat” that built up for landlords and tenants alike in this decade and much of it has now been trimmed off. If sales drop precipitously from this point, we are going to have a problem, but the economic and retail signs are pointing towards a bottoming out and leveling off.
Rent relief is taking several different forms:
- Early renewal at the existing rent or in some cases even a slightly lower rent, to lock in the rate for the tenant and get more term for the landlord (a popular strategy with private companies with little access to capital themselves).
- Rent deferral – reducing current rent but backloading it onto the end of the lease (a popular strategy with publicly traded REITs). While this reduces cash flow in the present, it attempts to preserve the income stream over the life of the lease.
- Reduced rent in exchange for little or no tenant allowance. Landlords are willing to exchange rent for tenant improvement dollars and this is happening in some instances. However, the tenant needs to then be in a position to fund their own store build out and this does not work for many tenants because of credit availability – especially mom and pop’s in the current environment.
- Asking rents are simply down, almost universally and especially in the off-mall environment. There are some tenants active in new store development that are getting rent relief in the form of reduced market rents and landlords are willing to do deals at ~25% less (than peak rents) in some cases for the right situation.
- Move down the road. Anecdotally, I have seen some tenants move down the road from their existing location and get “rent relief” by simply dealing with a more aggressive landlord in another shopping center.
Rent relief is going to be with us for some time and it will continue to be a renters market in the foreseeable future . Tenants with a smaller footprint have the best opportunity to exploit the current market by significantly reducing their occupancy costs in new store locations. Existing leases are best reduced when the end of term is close at hand.
Tags: rent concessions, rent relief, shopping center landlords, Shopping Center REITs Posted in
New Retail Tenants: Still Hard to Come By
If this article is any indication, new retail tenants are still very hard to come by for shopping center and mall owners. While the re-leasing market continues at a reasonably healthy clip for quality shopping centers (in particular, quality regional malls), there are few new retail deals being done beyond a handful of active restaurant chains, some auto stores and dollar stores. Of the nine tenants mentioned in the article, five are food tenants and the others consist of a used book store, a Halloween shop, a refurbished computer store and a children’s hair cuttery. Hardly the stuff that erases retail gloom and doom or revitalizes a entire portfolio. That said, creative leasing with “mom and pop” operations, non-traditional tenants and the like are where the market is right now, and for the foreseeable future. Simon is to be commended for pulling off any new deals in the current environment but this clearly illustrates the lack of new or exciting retail concepts as well as the difficulty of increasing occupancy in an overbuilt retail market struggling against the excesses of an entire decade.
Tags: Leasing Environment, New Retail Tenants, Simon Property Group Posted in
Mall REITs and The Aspirations of Forever 21
Forever 21 is slated to open in six quality General Growth Properties (GGP) regional malls in 2010. The collective size of these units totals nearly 600,000 square feet, thus averaging almost 100,000 sq. ft. per unit for Forever 21. This comes on the heels of Forever 21 taking over leases on Mervyn’s stores in California earlier this year. This typical Mervyn’s box is in the range of 80,000-90,000 sq. ft. Forever 21 has also announced numerous new 30,000-40,000 sq. ft. units at various high quality regional malls across the country, including malls owned by Simon Property Group. This is a dramatic shift upwards for Forever 21 in terms of the size of their stores. (These units are going to increase the total mall space devoted to this juniors segment by as much at 50% in some properties.) Previously, Forever 21 was principally found operating as an in-line tenant in regional malls with units sized in the 7,000-10,000 sq. ft. range. It is also a testament to mall landlord’s willingness to put Forever 21 in very high quality regional malls, in an environment where there are few other opportunities for new retail formats of this size. I would consider a good portion of the malls where these new stores have been announced to be A class properties ($400-$600 PSF+). The same cannot be said for all of the Mervyn’s units which include both B and C class properties.
The aspirations of Forever 21 begs the question, is there a need for ~100,000 sq. ft. of juniors apparel and accessories under one roof in anchor-like positions in regional malls? And secondly, what will be the impact on mall landlords with the introduction of this new format?
My first inclination is to consider previous attempts by Limited Stores/Limited Brands as well as Gap, Inc. to “upsize” their mall offerings to create a department store-like box, marrying their various store concepts under one roof. These operators also went through a period of simply “upsizing” individual store nameplates to a larger format. This was popular particularly in the late 1980s and the early to mid 1990s. Unfortunately, this did not work well for these particular operators. In fact, a few years later they reversed course and proceeded to work on downsizing many store units from Limited to Express to Old Navy as well as others. In short they, found the sales productivity did not justify the store size and costs associated with running the format, including occupancy costs. Occupancy costs typically average 15%-16% of store sales, although the range of occupancy costs can be quite large from the high single digits to over 20% at times. In the case of Limited divisions and Gap divisions, these companies have a long history of being able to negotiate below market rents with mall operators. It would not be uncommon for Gap or Limited divisions to negotiate up to a 50% discount on the market rental rate at a particular regional mall. That said, the larger juniors store format for these companies still could not justify the costs of running it. Overall these larger stores fared unfavorably relative to smaller units, and did not stand the test of time. They never reached the 80,000-100,000 sq. ft. that Forever 21 is envisioning for these new units. The Limited and Gap experience topped out at 40,000-50,000 sq. ft. and those were pretty rare.
Last month I visited the new Forever 21 (Forever XXI) store at Polaris Fashion Place, the newest regional mall in Columbus, Ohio. The store contains the typical trendy merchandise in the so-called “cheap fashions” segment also occupied by competitors Charlotte Russe and H&M. The store occupies roughly 40,000-50,000 sq. ft. on two levels and is an example of Forever 21’s march to larger store formats. It is part of the “lifestyle wing” at Polaris, essentially an outdoor court of shops and restaurants attached to the mall. My first observation was the store was merchandised at a lower level on a sq. ft. basis than the typical in-line mall format. Also when compared to traditional department store operators, such as Macy’s, the store is again merchandised to a lower level on a goods per foot basis. The store also contained a small young mens presentation, occupying a few thousand sq. ft. I have to believe that less merchandise per foot equals lower productivity. And a larger store format always equals lower productivity.
From the mall landlord perspective, this is an idea whose time has come. There are few if any retailers willing to take 30,000-100,000 sq. ft. positions in regional malls these days. While these store are being subsidized at healthy levels with allowances for store build-out provided by the landlord, the rents are by no means dramatically below market. In fact other small formats in juniors apparel are paying less for smaller store units at the same properties. At best the rents are 1/3 off market — and the market would be for a store size in the 7,000-10,000 sq. ft. range. This will likely be a boon to mall landlords in the short run. However, paying fairly high rents for an untested concept that dramatically increases the juniors merchandise, even at quality regional malls is not without risk. In fact, the sales productivity these units can generate will be the key determinant of success for both Forever 21 and the landlord. Given the rent structure, these units will have to be highly productive (~300 $PSF) when compared to other mall anchors and junior anchors. Intuition, observation and past experience suggest this is a low probability outcome. I can’t help but think of Steve & Barry’s which a few years ago was also thought of as an idea whose time had come.
Most department stores are struggling to find a message and an offering that resonates with shoppers. Most department stores are also paying little or no rent in regional mall anchor positions. Will Forever 21 be the answer? Or does Forever 21’s larger format represent an answer to a question that no one is asking?
My analysis strongly suggests the rent structure is out of line with the potential sales productivity to the point where there will be little if any margin for error with this concept. It is also likely to put significant pressure on other juniors stores in regional malls through market share capture by Forever 21 simply due to the critical mass of these larger units (negatively impacting landlords in other areas). And as noted previously, past experience does not favor this transition from in-line mall retailer to junior department store. The future 100,000 sq. ft. units are being rolled out aggressively with no proof of concept, let alone any testing for viability. And then, there is the economy and poor retailing climate. All in all, history, analysis and sentiment do not favor these aspirations.
Tags: charlotte russe, forever 21, H&M, junior department stores, Mall REITs, new retail formats Posted in
Macerich: Queens Center Cap Rate Lower Than Anticipated
Macerich has sold a 49% interest in Queens Center to Cadillac Fairview in exchange for equity and assumption of debt, totalling $317 million. The reported cap rate is much lower than was previously being discussed publicly. Macerich and other analysts were talking about cap rates in the 8.0%-8.5% range, and lo and behold Macerich is reporting in their second quarter conference call that cap rate is just north of 7%. Trading debt for equity is a viable strategy in the current environment and this is the tip of the iceberg for Macerich since they have three-fourths of their debt expiring between now and 2012.
At the end of the day the 7% cap rate is a mixed bag. High quality “A” malls could have easily traded 100 or more basis points lower in the last few years and this deal is a clear indication of where are today — even on quality assets. However, this cap rate is still considerably lower than what was being bandied about publicly. Macerich should hurry because these cap rates are almost certain to be inching higher next year due to retail climate and sentiment.
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