U.S. RECESSION EMPTYING MALLS Spur Rent Reductions Among Prime Retailers!
U.S. RECESSION EMPTYING MALLS Spur Rent Reductions Among Prime Retailers!
BIG RETAILERS GAP INC. WILLIAMS-SONOMA ANN TAYLOR SUCCESSFULLY NEGOTIATING SIZABLE MALL RENT CONCESSIONS!
As the economy continues weak in many parts of the U.S. and retail sales continue to slide downward many of the largest retailers are using favorable language in their mall and shopping center leases to renegotiate their store rents. Savings to these big chains could be substantial!
Reported in today’s Wall Street Journal by Elizabeth Homes Vanessa O’Connell and Kris Hudson Many retailers are exercising benefits provided by "contenancy clauses" common in many retail store leases. This language lets tenants receive considerable rent reductions or even terminate their leases if important tenants in a shopping center close down and leave.
The Chico’s Apparel Store chain says it has saved over $8 Million by employing contenancy clauses in its store leases. Charming Shoppes Inc which operates Ladies Apparel Stores Lane Bryant and Fashion Bug figures to save about $10 Million in 2009 in negotiated rent relief using the same provisions.
Often a mall operator in breach of it’s contenancy promise allows the retailer to cut its rent in some cases by 50% or more until the departing major tenant is replaced. Many leases allow other tenants to terminate their leases and leave themselves if no acceptable new store tenants are found in a typical one-year grace period.
At a time when many mall and shopping center operators are struggling to stay afloat among record vacancies clever retailers are using their contenancy clauses to negotiate multi-year reductions in rent sometimes in exchange for agreeing to extend their lease terms.
For retail stores rent is among its biggest expenses often accounting for up to 12% of the store’s gross annual revenue. Rents are typically a fixed cost – they don’t usually go down as sales do. Declining sales this year may push the rent/gross sales percentage to upwards of 13% this year according to estimates by Citigroup.
For Chino’s rent as a percentage of sales revenue increased to 10% in 2008 versus 7% in 2006.
Mall and shopping center operators today are suffering through prolonged revenue drops themselves during the current U.S. Recession. According to Reis Inc. a research company specializing in commercial real estate trends the average lease rate at non-enclosed shopping centers and strip centers (excluding enclosed malls) in the top 77 U.S. Metro Markets declined for the fifth consecutive quarter during the Second Quarter 2009. That is the longest string of quarterly declines since Reis began its research in 1980.
In enclosed shopping malls average store rents fell for the third consecutive quarter during the Second Quarter of this year. Store vacancies have also reached near-historic high levels as 27 major retail chains including Linens ‘n Things Circuit City and The Sharper Image have filled for bankruptcy within the last year then liquidated their assets and fled their retail stores.
Even long-time retail fixtures Blockbuster and Starbucks have been aggressively pursuing contenancy clauses and other lease concession provisions in search of monthly rental savings.
Store failures trigger reduced rents across the center or canceled leases greater vacancies and at the extreme virtual retail ghost towns in some malls and strip centers.
DEAN MOSS & DEAN’S TEAM CHICAGO
