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Nationals moving to specialty arena

By Kevin Kenyon

Sears, Macy's, Barnes & Noble, Warner Bros., Kay-Bee Toys.

This is only the short list of a growing number of retail heavyweights which have staked a claim in specialty leasing in recent years. While the majority initially participated in specialty programs only during the Christmas season, more are looking to take advantage of this lucrative business at other times as well.

Some are outposting in centers where they already have a store, while others are test-marketing locations to help make expansion decisions. Several are doing both.

What these national retailers also are doing, experts say, is providing competition for the mom-and-pop merchants who pioneered the industry.

In addition, some of these entrepreneurs are expected to develop into the next generation of permanent retailers. Is it possible that one of the biggest problems facing the shopping center industry overall -- sameness -- will one day affect the specialty leasing industry?

To Duffy Weir, director of specialty leasing for The Rouse Co., Columbia, Md., the question comes down to giving customers what they want.

"They're doing business, and our customers are voting that they want those products sheerly out of the sales volumes that those nationals are pulling down. That tells me as the leasing person that it's a customer need and it's being filled."

With recent studies indicating that shopping patterns are concentrating less around the Christmas season and spreading out throughout the year, more nationals will begin to participate in specialty leasing other than in the fourth quarter, Ms. Weir believes. Outposting in kiosks has helped many national retailers generate sales in their in-line stores. Many offer coupons to channel customers back to their stores.

"I think it's really brilliant marketing. It not only benefits them by creating customer satisfaction in the common area, it also benefits the customer and benefits us, the landlord, by having them drive more traffic into their permanent store," Ms. Weir said.

However, she said, specialty leasing has "a real balancing act to perform" in ensuring it doesn't lose sight of mom-and-pop merchants, whom many regard as the industry's last vestige of uniqueness.

"What makes our properties unique and distinct are the entrepreneurial retailers we nurture and incubate over time, because they are going to be the next regional merchants and hopefully the next national merchants -- that's the real success story for me," Ms. Weir said.

Anton (Tony) Faford, vice president, specialty leasing for WellsPark Group, Newton, Mass., said the majority (90%) of pushcart tenants he oversees are still mom-and-pop retailers, while the nationals mostly concentrate on kiosk and temporary in-line locations. About half of the kiosk and temporary in-line spaces in WellsPark's portfolio are occupied by nationals, he estimated.

"Mom-and-pops are still alive and well and doing lots of business in our centers," he said, adding that it is ultimately the developers' responsibility to control the mix. "We as developers control the availability of space. If a mom-and-pop is in a temporary in-line space for several months, we would not terminate that agreement to bring in a national tenant just for Christmas."

Mr. Faford noted that landlords lost national tenants during the last five years between bankruptcies and store closings, and that the majority of resulting vacant temporary space was picked up by local merchants. That could happen again, he warned.

At one time, national tenants never considered specialty leasing. After years of prodding, nationals seem finally to understand that they can make money in this business, said Melinda Holland, director of specialty leasing for General Growth Properties, Chicago. The firm strongly encourages national retailers to outpost or try temporary locations in malls in order to test a market, Ms. Holland said.

"Specialty leasing has come full-circle. At the beginning everyone was saying 'those carts in the middle of the mall.' Now those carts in the middle of the mall are very profitable and I think you'll see more nationals getting involved in that."

The entry of nationals into the specialty arena is good news for developers, believes Tamera Norwood, leasing representative for Westcor Partners, Phoenix.

"Eventually, that's going to be the majority of tenants in common areas, kiosks and temporary in-lines, and it's much better for the developer."

Westcor, which owns 20 centers, mostly in Arizona, uses the strip centers it owns around its regional malls to incubate pushcart tenants. Moving temporary tenants straight into an in-line mall space is too great a leap, Ms. Norwood argues. Although the company only instituted the strategy in late 1996, she believes mom-and-pop retailers will have a much better chance to succeed in the long run.

"When you make mistakes at $24 per square foot [in a strip center], you can overcome that and learn from it. When you're making a mistake at $50 or $60 or $70 a square foot [in-line] with $20 [common area]charges on top of that, it's usually devastating to a business."

But just as pushcart tenants need testing and experience to move into in-line spaces, national retailers can't just march into specialty retailing overnight.

Nationals have to understand that they need to do something unique if they want to become specialty merchants, said David Contis, chief operating officer for The Macerich Co., Santa Monica, Calif. "We have to feel that they're adding something to the program. If all they're going to do is take 20% of their store and stick it out on a cart, that doesn't do anything for the mall."

Of course, he added, nationals do lease the mall and should be given every opportunity to succeed, but not at the expense of local retailers.

"If I have a national tenant in the mall, and they also want to do a cart, from our perspective they're going to have to compete for that space on a merchandise mix and cash -flow basis like everybody else," he explained.

Although the majority of national merchants understand the need to be creative, Mr. Contis said that some just don't get it. "There are certain national merchants out there doing temporary deals that I'm not that in love with ... because they're not adding to the sizzle or excitement of what the specialty leasing program is supposed to be about."

Heidi A. Maybruck, director of specialty leasing for Glimcher Realty Trust, Columbus, Ohio, agreed that nationals don't always understand that specialty leasing is an industry in and of itself. It is not unheard of, she explained, for a national to expect a better deal because it has an in-line store.

"We definitely respect [nationals] as our permanent allies in the shopping center, but specialty leasing is a whole other ball game. They have to respect the fact that this is a whole other entity -- the common area is not part of the permanent leasing game, we have our rules, we have our rents."

It's all a matter of maintaining a good balance and never forgetting that the customer is what really matters at the end of the day, said Carol Ann (Cas) Sivek, vice president of specialty leasing for TrizecHahn Centers, San Diego.

"A certain percentage of outposting is good, a certain percentage of national-type temporary tenants is good, and a certain percentage of your local flavor is good. You just can't be totally driven by taking all the biggest deals and putting them out there without paying attention to your customer."

With mom-and-pop retailers facing higher rents than ever, Ms. Sivek believes that the onus is now on them to respond.

"The real challenge is in the hands of the retailer who made these programs so successful and now has to high-step it and be a more professional retailer to stay in this business."