Tenant's leverage is on the rise
A new JLL study of 90 of the nation’s largest malls states that Class A malls are fine and Class B and C malls need to reinvent — and quickly, in order to stay relevant.
“A New Mall Rises” reports that the 81 top-tier regional and super-regional malls in the country command average asking rents of $72.44 per square foot — a price 3.5 times higher than that at second-tier malls. So, while there are challenges for operators of the second-tier properties, strong retail tenants at those locations are presented with a golden opportunity, according to JLL’s point person on the restructuring of leases for retailers.
“It’s become much more of a tenant’s market,” said Mark Richardson, EVP of restructuring at JLL. “Negotiating leverage began to shift to tenants more than a year ago, and it continues to shift in their direction.”
Richardson qualifies that the strength of a retailer’s upper hand depends on its sales and profit performance at a given location; but he stresses that strong retail tenants in mid-tier malls have the ability to renegotiate their leases due to the need for landlords to keep occupancies.
As always in real estate, location is crucial; and, as a result, up-and-coming stores and retailers in hot categories have increased bargaining power with landlords.
“Great location and a great trade area with great demographics make a mall, but every mall is looking to renovate,” said James Cook, JLL’s head of retail research. “Shoppers are all looking for the new thing, and all malls are trying to keep up with the times.”
JLL’s study, Cook said, discovered that one-fifth of enclosed malls surveyed were either completely or partially converting to open-air centers. Such a move awards greater negotiation powers — for instance, to popular national restaurant chains that beckon to consumers from endcaps or outparcels. Four in 10 of the malls investigated by JLL were adding new food and beverage options, making it the No. 1 renovation strategy in physical retail.
“For chains on the upswing, it’s a great time to be in top-tier malls.” Richardson said. “In many cases, they’re doing higher revenues at lower rents. It’s a good time for all retailers to improve their bottom lines by reducing their occupancy costs.”
To proceed, Richardson offers this simple action plan to retailers: (1) Be cautious in committing to new store locations with in-depth research and rigorous due diligence; (2) protect your strongest stores by considering longer lease terms; and (3) work hard to renegotiate leases for your weakest stores, or eliminate them.
Given the current environment, Richardson said, landlords of Class B and C malls are more eager than ever to work with tenants to preserve their symbiotic relationship.