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Westward ho
Japanese centers look to Western anchors to differentiate themselves

By Susan Thorne

When East meets West, the result can be a beneficial mix of features from both worlds. That principle is at work in Japan's shopping center sector, where the craze for foreign goods and brand names is leading center developers to "go Western" in varying degrees to attract foreign retailers. This is bringing significant change in the whole area of developer-tenant relations and shopping center leasing.

Japan's financial crisis has hurt retail spending and made the whole shopping center environment more competitive in recent years, explained Ronald E. Lavoie, managing director in Tokyo for RTKL International design and urban planners, which is working on 10 shopping center projects in Japan. (See sidebar, page 66)

Many of Japan's leading shopping center developers are department store companies that anchor their centers with their own stores, and the declining revenues of the department store sector have caused these developers to search for other retail offerings to attract shoppers, Lavoie explained. Consequently, many endeavor to differentiate themselves by bringing in Western retail banners.

"There's an incredible demand for foreign retailers," he said. "It's driving the changes that are happening, particularly in the area of specialty retailing."

Center developers Lavoie meets often ask him for introductions to foreign retailers, so eager are they to bring new names to their centers' retail mix.

Yet Western retailers considering the Japanese market are frequently discouraged by traditional leasing arrangements in that country, which can include sizable deposits and long lease terms. "A typical term could be a deposit of one year's rent," Lavoie explained. "Who is going to take that kind of risk in a market that is untested?"

In the last two to three years, developers have been waking up to the differences between Japanese and Western leasing terms, and making changes to attract desirable tenants to their centers. Percentage rent -- virtually unheard of in Japan until recently -- is being offered as an alternative to all or part of fixed rent in certain centers. Some developers are reducing or waiving deposits and "key money," another type of financial guarantee usually required as part of a shopping center lease. Shorter lease terms -- as little as three or four years instead of the traditional 20 -- are now an option in some cases, too.

Tenant-friendly rent terms can certainly pay off for the developer, points out Seth Sulkin, president and CEO of Washington, D.C.-based Pacifica Corp., one of few Western development firms active in Japan.

At Torius, a 2.6-million-square-foot center in Fukuyama, which Pacifica co-developed with the Torius Corp. of Tokyo, many tenants were offered whatever combination of fixed and percentage rent they wanted.

"In some cases, the tenant requested and got rent as a percentage of sales with no fixed rent," Sulkin said.

Such flexible lease terms were effective in bringing in the tenants that the developer wanted, such as Virgin Cinema and Costco -- the first units in Japan for both retailers.

The Japanese shopper's love of Western brands has played a big role in bringing about leasing changes, but there are other forces at work, too. The balance of power between developers and tenants has been shifting in the tenant's favor in recent years, points out Kozue Honda, director of marketing and research with Tech-R&Ds Co., Tokyo, a retail and development consultancy.

As little as five years ago the developer had the upper hand, she said, "but because of the economic and financial crisis, I think the tenant is stronger now." Popular retailers such as The Gap or Japan's MUJI (a clothing, food and housewares retailer) are particularly strong, she noted, and able to dictate lease terms.

Another trend supporting lease changes is the growing number of foreign retailers that choose to enter Japan directly. Linda Miller, executive vice president of American Malls International (AMI), the Washington, D.C.-based outlet mall developer active in Japan, points out that although Western retail brands are seen everywhere in the Japanese retail landscape, the majority were previously brought into the country by a Japanese partner or licensee. The giant Japanese retail developer JUSCO controls a majority share in the Japanese operations of The Sports Authority, for example. But more foreign retailers such as The Gap, Nike and Disney are bringing their own banners into the country, and pressing for Western-style lease provisions when they do.

The presence of U.S. shopping center developers is having the same effect. "We're pushing the envelope," Miller said. "We've adopted a lot of Western terms and conditions, while trying to be respectful of the Japanese culture and ways." Retailing via e-commerce is expanding the Western presence, too, she noted.

Changes in the developer's situation also are influencing leasing. Sulkin reports that leasing of land for shopping center development is now permitted for 10-, 20-, 30- or sometimes 50-year terms, which means that developers no longer have to invest the time and expense necessary to purchase land; suburban shopping centers have been most affected by this rewriting of regulations in the 1990s.

Pacifica's Torius Center, for instance, has a 20-year lease which is expected to be renewed. The savings developers realize under long-term leases by avoiding ownership costs can be passed along to tenants in the form of percentage rents and lower or no deposits, Sulkin says.

But despite unprecedented influence from foreign sources, the tenant's status in Japan is still very different from that of a typical U.S. mall tenant. Performance clauses requiring a certain level of sales per square foot are unknown, Miller said, and it is difficult for a landlord to replace a tenant that doesn't want to leave, though its rent can be raised.

Japanese leases rarely stipulate the character of a tenant's merchandise, and Miller anticipates potential problems if a tenant loses license rights for a particular brand, for example.

Generally, she said, Japanese retail tenant leases are less detailed than U.S. ones; trust is an important part of business relationships, so contracts tend to be less legalistic. While it may take time to develop such a relationship, "there's a strong sense of commitment on the part of the parties once they sign," she said.

One of the biggest needs at present is for education to help developers and tenants understand the nature and benefits of Western-style lease terms. Tech-R&D's Honda refers to ICSC publications on marketing and leasing and even translates key passages for clients in her work with retailers and developers. Do these Japanese interests welcome new ways of doing business?

"Some developers like the change," she said. "They like to get the good tenants."

She notes that the mixture of East and West works well in some cases, but that Japanese traditions have their strong points, too.

In any case, Honda predicts that the Westernization of tenancy conditions will continue as new foreign retail entrants arrive on Japan's shores. British druggist Boots, Western cinema companies, HMV, Virgin, and Warner Bros., The Home Depot and France's hypermarket giant Carrefour are in the latest wave of retailers entering or set to enter the market.