The news and market reports make clear e-commerce is creating a challenging brick-and-mortar retail market. Major names like Abercrombie & Fitch and J. Crew are rethinking retail space as trends push towards an expanded online inventory and smaller physical spaces. Brands know this and are leveraging this knowledge when negotiating mall leases.
Shorter lease terms
Right now a start-up’s life cycle is around 7-10 years. With a volatile market and the growth of e-commerce into sales, retail tenants are leery to sign a 10-year lease. Dozens of established brands have filed for bankruptcy or announced plans to reduce physical locations as a method of reducing costs.
In this volatile market, mall tenants are negotiating leases as short as 1-to-2 years. That’s a significant change from durations in the 5-to-10 year range.
“You’re certainly seeing the renewals geared toward the shorter term, rather than the five-year renewal,” Andrew Graiser, head of A&G Realty Partners, told Bloomberg. The disruption in the brick-and-mortar space presents challenges to determining the right number of stores. Consequently, retailers want the flexibility to change direction with market conditions.
Footprint Reduction
In addition to reducing the number of locations, retailers are trending towards smaller stores. Brands are turning away from expansive square footage to a more intimate setting that allows them to build more personalized customer experiences. When Macy’s shuttered its doors in the Irvine Spectrum Center, the mall converted the space into 20 units for smaller merchants.
“Landlords are going to have to be more flexible, not just about the price, but about how space is used,” said Richard Kestenbaum, a partner at Triangle Capital, LLC, writes in Forbes.
While class-A spaces tend to do well, older shopping centers may not be built to this shift in retail needs. Mall owners or operators are turning towards renovations, both as a way to lure customers and retailers. JLL reported over 90 malls spent $8 billion to upgrade their spaces.
Lower Rent
Most markets report there is more retail footage than demands needs. In this case, the mall owners must lure retailers with competitive lease rates.
In a landscape where more retailers are shuttering doors, mall tenants believe they have the advantage. After all, an empty space generates no revenue for the owner. Tenants are negotiating for lower rent, especially in markets or C-class malls where keeping tenants in a space is more challenging.
“We can’t remember a time over the past 10 years when the companies we cover were so consistently citing lower rents,” Jay Sole, Morgan Stanley analyst, told The Street.
Mall owners and operators are staying flexible and creative to attract the right tenants. By renovating spaces to attract brands looking for smaller spaces, to re-negotiating lease terms, and accepting shorter leases, operators continue to keep spaces occupied and attracting customers.
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