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Specialty leasing

DID SOMEONE SAY ‘TEMPORARY’ TENANTS?

BY MAURA K. AMMENHEUSER

Faneuil Hall, where it all started.

Rouse Co. executives struggling to lease Boston’s Faneuil Hall before its opening decades ago found a short-term fix for their problem that became a permanent fixture of the industry.

The late James W. Rouse first brought local pushcart merchants onto the center’s grounds, recalls Rick Evans, a former Rouse official who is now a Los Angeles developer. Evans calls this the first temporary leasing strategy. “Jim’s vision was to have each cart for only a few weeks, [ensuring] there’s always a surprise.” That was in fact too temporary, he says with a chuckle, but the basic premise proved sound.

“Back in the ’80s it was probably more of an afterthought,” said Coleen M. McNelis, vice president of lease management at The Macerich Co. But temp leasing has since become a $10 billion-a-year business, according to trade quarterly Specialty Retail Report.

The carts worked so well at Faneuil, a popular indoor-outdoor, retail-dining urban redevelopment project, that Rouse brought them into other outdoor projects and, eventually, into a traditional enclosed mall — Highland Mall, Austin, Texas — where they lent seasonal spice to the center.

“They made money,” said Deborah Kravitz, president of Provezano Resources, a Los Angeles-based specialty leasing consulting firm. “Anything that makes money tends to spread.”

So carts began rolling into many centers, mostly during the holidays, and from there they gained a permanent foothold in the industry. Today kiosks, cell phone booths, coin-operated kiddie rides, hydromassage tubes and more populate common areas everywhere. “Specialty leasing” complements a mall’s merchandise mix and adds sales, for minimal investment. Companies employ full-time temp-tenant execs, buy custom-designed carts and incubate new retail concepts with temp leases. And in an age of public ownership, investors increasingly demand robust temp revenue.

“Specialty leasing’s been transformed from when, 25 years ago, it was a part-time, holiday opportunity,” said Mark London, vice president and director of leasing at Schostak Bros. & Co., Southfield, Mich. “Now it’s a full-time discipline.” London helped design what he believes was the first retail merchandising unit to replace miscellaneous carts and folding tables and allow more flexible, efficient and attractive displays.

Half the shoppers who browse at carts end up buying something, spending an average of $14 per visit, according to ICSC research. “It’s sophisticated now,” said McNelis. “Developers are spending lots more money on cart units because sales justify it.” Indeed, she says, they can spend anywhere from $7,000 to as much as $40,000 per cart, depending on the amount of care they take to match the unit to the center’s decor.

How did the lowly pushcart gain this much clout? Well, landlords realized that unused space could generate money, and the temps proliferated. Growth-conscious owners expect a program making, say, $300,000 one year to top that the next; thus the expansion of temp leasing year-round to gain sales, says Kravitz.

As the temp tenants multiplied, their wares also broadened considerably.

Temps “capitalize on fads while they’re hot,” London said. (Think Beanie Babies or, more recently, candles and body jewelry.) Lately, any demo-friendly products (nail care items, remote-controlled toys) are popular. “It’s safe to say that anti-stress, in every form, is being sold, from aquamassage to herbal packs,” said Micheal A. Brother, national program consultant for Joseph K. & Co., Honolulu, which runs Santa’s Pen personalized Christmas gift carts in 160 malls.

What else is hot? “The Halloween guy, from September to the middle of November, has blown the doors off,” said Scott Prigge, vice president of lease management at Jacksonville, Fla.-based Regency Centers Corp., which operates 267 strip centers.

The industry, it seems, has learned that one can sell anything from temporary spaces (well, almost — Schostak Bros. nixed one deal involving handguns).

Inspired by the success of retail carts at Faneuil Hall, its retail-dining complex in Boston, Rouse successfully introduced them into the traditional, enclosed Highland Mall (above) in Austin, Texas. The rest, as they say, is history.

Cell phone companies and herbal diet supplement maker Metabolife in particular have made a huge impact, Kravitz says. In the 1990s telecommunications companies recognized the marketing power of kiosks. They pay three times the usual rent, Kravitz says, so centers lease to multiple phone companies, often with two kiosks each per property. Then came Metabolife’s national ads urging consumers to buy its products at booths inside the local mall. Distributors made $20,000 monthly for about two years, Kravitz says. Metabolife and the telecoms raised competition and rents — which vary, but today top $15,000 for the two-month holiday season at the best malls, according to Brother.

Like the permanent tenants, temps usually pay a flat monthly fee plus a percentage of sales past a breakpoint. This is usually higher for temps — about 12 to 15 percent of sales, versus just 4 to 6 percent for permanent tenants, says Laurie A. Baker, Schostak Bros.’ director of specialty leasing. Licensing agreements (the shortest leases) are basically month-to-month, flat-fee-only contracts giving landlords 30-day (or shorter) kick-out clauses and control over a merchant’s aesthetics.

Defining success is tricky; it depends on the market and the players. Temps at strong malls can do about $500 per square foot, Brother says. He and Evans want sales of five times the rent. “That’s a real high number to a lot of people,” Evans said, “but they forget the tenant has no investment in anything other than their merchandise.”

Landlords and bankers take temp revenue seriously.

“At first it was ‘found’ money — nobody expected anything from it,” Brother said. “Shortly after that, it became part of the budget.”

Ten years ago lenders began including temp sales in a property’s value, says London, citing a case in which that made a $1 million difference. Also, as center ownership and management shifted from the private to the public sector, landlords began making permanent commitments to specialty leasing programs, he adds, because with REITs “it’s all about income.”

Few landlords will quantify how much revenue they reap from temps, saying only that it varies according to market, property, in-line vacancies and more, though McNelis says 10 percent of income from temps may be typical.

Said Kravitz: “The average mall will have a program of $300,000 to $600,000 [annually]. Maybe an ‘A’ mall does $1 million plus. There are a few in the $2 million to $3 million range.” The accuracy of a quarterly forecast is more important to Wall Street than the actual dollar amounts, she adds.

But specialty leasing may have peaked. Kravitz says landlords jam too many temps into centers, especially before Christmas, and don’t care about quality. “There are carts everywhere — entertainment centers, lifestyle centers, strip centers, bus stations, supermarkets,” she said. “After a while you won’t notice them.”

How many is too many? For common areas, there’s no strict rule. But the fire codes and restrictions imposed by permanent tenants help determine how many carts a center can accommodate. Baker notes that walkways must remain passable for crowds, wheelchairs and strollers.

Leasing executives say they’re careful who they rent to; they scrutinize business plans, financing and merchandise. “If it’s a good retailer, with a short-term deal we’re not monitoring the sales levels,” Prigge said. “They’re an add to the center. We don’t want to be putting in someone who’s just paying the rent.”

Yet Kravitz and Brother say many landlords do exactly that, booking as many temps as they can fit.

“It’s kind of a crap shoot,” said Kravitz. “It’s open to anything that will make money.”

In any case, some say specialty leasing can’t continue its explosive growth.

“The programs will max out and somewhat stagnate,” Kravitz said. Fewer mom-and-pops can afford the increasingly expensive carts, so specialty leasing doesn’t function as an incubator to the degree it did in the past, says Brother. Further, owners will lose the “beat-last-year mentality,” according to Kravitz, and start to view temps as a stabilized income source. Some centers have already hit the limit of what they can charge for temp rent, she says, and some permanent tenants now restrict cart placement even while embracing a cart or two of their own during the holidays or when rolling out a new product.

“I’d like to think it’ll be a maturing process, a sorting out, an improvement,” Brother said. Landlords won’t turn away much rent money, but “hopefully, they’ll spend the next period getting it right.”

Specialty Retailing Conference & Trade Exposition, March 20-24. For full details and registration, visit www.icsc.org.

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