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SQUEEZING THEM ALL IN

Owners of the top U.S. Malls must find new ways to accommodate unprecedented tenant demand for space

By Curt Hazlett

General Growth Properties, like other shopping center owners, is keen to attract new retail concepts. “There are a lot of European retailers making their entry into the U.S.,” said Robert A. Michaels, General Growth’s president and COO. “Abercrombie has a new concept coming out, plus they have Ruehl. American Eagle has two new concepts — Martin + Osa and Aerie. Neiman Marcus has Cusp.” His list of prospects is long.

But coveted as promising newcomers may be, they pose a problem for the industry: Where are they to be placed? Flush with the successes of the past few years, many top centers are nearly fully leased, and yet owners know that keeping the tenant mix vibrant is the best way to ensure continued success.

Accommodating new concepts is General Growth’s biggest challenge over the next few years, says Michaels. Indeed, the firm’s centers reported an overall occupancy rate last year of 93.6 percent — 97.6 percent when leases of less than 12 months were included. “The centers are basically full,” Michaels said, “and there are a lot of new concepts coming on board that we would like to get in.” And that does not even include existing retailers that want to expand.

For landlords, it seems, space is the new frontier. “It’s a great problem to have,” said Marshall Loeb, executive vice president and COO of Glimcher Realty Trust. “Retailers come to us and say, ‘We’d like to be in your property,’ and we try to figure out how to squeeze them onto the site. You’re never really done with an asset.”

Increasingly, managing a shopping center is like playing a game of chess, says Loeb, with the managers thinking several moves ahead about tenant mix and maximizing the property’s potential.

In many cases, there’s a physical solution — a relatively easy expansion into the parking lot to create space for a coveted restaurant chain, for instance. In fact, the industry has been expanding properties at a fast pace for the past few years, but the process is expensive and time-consuming.

Remerchandising, on the other hand, is faster and can have a huge impact on a property’s performance. But it requires discipline and planning. “We’re really trying to train our leasing agents and general managers to always be conscious of how many athletic-shoe stores or chocolate stores there are in a property,” said Loeb. “Once you overdo a category, you are almost guaranteeing that no one is going to perform well. So let’s weed those out, especially when we’re full, and put in better tenants.”

This was not always the approach. A few years ago the consolidation among department stores left many landlords with more space and less choice than they liked. For the most part, they stepped up to the challenge by subdividing big vacant spaces or leasing them to tenants new to a mall setting. “We really pushed for occupancy last year,” said Loeb, “and this year is the year of the rent. When you have a full building you have negotiating power.”

Improving the tenant roster involves strategy and planning. “We train people to look at our average sales per square foot and [at] who our underperformers are,” Loeb said. “If the lease is coming up, we tell them: ‘Don’t just automatically renew it; let’s be thinking a year or two in advance about who we could slide into that space.’ ”

When expiration is still a way off, the landlord has other options. “If the retailer is struggling, you can probably get some kind of tenant buyout, or you can use the landlord buyout to get that space back,” said Michaels. “Or you can relocate them, if they are too large, into a smaller space in another part of the center.”

Such negotiations are happening more often these days, says Edward C. Dawda, who specializes in real estate law at the firm of Dawda, Mann, Mulcahy & Sadler, in Bloomfield Hills, Mich. “There is a lot of reinventing going on in malls, and what’s happening is that the landlord winds up buying out the space of the retailer so that somebody else who is the hot item of the moment can come in,” Dawda said. “Sometimes that’s spelled out in the lease, but often it requires a fresh negotiation.”

Loeb cites the case of one Glimcher tenant that mall management wanted to downsize, even though the tenant still had 10 years on the lease. “They got negotiating power because of the lease terms,” he said. “The good news for them is that their rent will drop and they’ll get an improvement allowance.” Glimcher, in turn, will get a better performer in the space.

Not renewing a tenant’s lease can be delicate, Loeb says, since an owner might want to keep the retailer at its other properties and thus cannot afford to burn bridges. “It’s tricky,” he said. “You’re telling someone what they don’t want to hear while trying to stay best of friends with them.”

And yet remerchandising is key to keeping a property healthy, says Robert H. Spratt Jr., president of Hill Partners, a Charlotte, N.C., retail developer. “You need to weed out the weaker tenants and replace them with stronger and more productive ones that can pay more rent and create more interest within the center,” Spratt said. “If a center has been open for a while and there’s been a shift in the demographics, you constantly need to remerchandise it and keep it fresh. If you fall asleep at the wheel, it can lead to problems.”

Of course, all this requires research. “You need to understand the consumer in as much detail as you can — their lifestyle, where they work, their average age, their education levels — and merchandise the center to meet their needs,” Spratt said.

Even so, customers sometimes complain about changes. At Biltmore Fashion Park, in Phoenix, the departure of a Banana Republic, an Oilily women’s and children’s boutique and a Champps restaurant prompted a few complaints from shoppers, who told the local newspaper that they feared the mall was becoming too luxury-oriented. And in fact, among the new tenants entering the mall this year are Oceanaire Seafood Room, a high-end chain; and Calypso Christiane Celie, an upscale women’s clothing chain.

In the end, though, an infusion of new stores is vital to a property’s performance. “There are all kinds of new concepts out there, and that’s really what the mall is all about — it’s about change,” said Michaels.

Finding ways to create a vibrant mix is part of what makes managing retail properties interesting, says Loeb, who joined Glimcher less than two years ago from Parkway Properties, an office- industrial REIT.

“We had maybe 70 buildings, and in any given year 50 or 55 were almost on autopilot — they were 90-plus percent leased, and you might slide one new tenant in,” he said. “In retail, even when you are virtually full, you’re still trying to rework those properties and asking what you can build in the parking lot.

“I used to see the retail guys at a NAREIT convention, and they would say they were the graduate school of real estate, and I would slough that off and think, those guys are arrogant,” Loeb said. “Now that I’ve gotten a taste of it, I agree — there are certainly more factors you have to dig into.”