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The challenge of Regional Shopping Centre vacancies

Right now, numerous regional shopping centres in Australia are experiencing acute problems with struggling retailers. The problem is not generally under-performing operators but negative consumer sentiment, lack of disposable income due to high home mortgages, small business underfunding and internet retailing – to name the most commonly quoted causes.

One centre recently visited had a retail tenancy vacancy of 10%, with a further 10% occupied by temporary fringe retail operators in such areas as budget fashion, gifts, discount books and DVD’s, and confectionery.  It would be unsurprising to learn that the majority of these temporary operators would be paying anything other than a peppercorn rent. Notwithstanding that fact, they would be unlikely to survive long past the Christmas holiday period and into the bleakest retail month of the year, February.

Very occasionally one of these tenancies is next to a solid operator with a strong history and on a modest but perceptible growth path.  This tenant is likely to have entered into his lease when times were better, and thus agreed at the time to a rent per m2 and annual reviews which would not be achievable in negotiations for a new lease today. The retail tenancy may have several years to run.

This tenant may also see opportunities to grow his turnover by tweaking his business model and the range of merchandise offered. This however would require more space.  At the same time the tenant is very wary of increasing his overheads and exposure given prevailing business confidence and the state of the economy.

For a flexible and opportunistic Shopping Centre Landlord, there may be a potential win/win in this situation.

The Retail Vacancy Solution

If the retailer could be persuaded to expand to take the neighbouring tenancy, the Landlord solves a vacancy problem. At the same time the Landlord consolidates or locks in for a longer term one of his mini-anchor tenants. This would be done by way of a surrender and a new lease.  There would also be an immediate beneficial effect on the shopping centre’s capitalization rate.

Given the prevailing retailing conditions, incentives would be necessary to give the current retail operator, the required level of comfort to take the risk, make the commitment to more stock, staff and system change, and make all of this happen.

The incentives could be:

  • Agreeing on commercial terms which would result in minimal increase in total occupancy costs for the larger area.
  • Changing to a gross lease may be attractive to the tenant and is administratively much simpler for the Landlord.
  • A significant fitout subsidy.

The retailing landscape will improve in time. At lease expiry it is likely there will be the opportunity for the Landlord to negotiate lease renewal from a stronger position.  The retailer will have had the time to consolidate, and build some profitability into the business which will increase the incentive to renew.  In the interim there has been enhanced customer service, and improvement to the tenancy mix by way of the expanded offering.

A brighter future for Regional Retailers

What is needed now is what we call the “mediative mindset”. The ability to see beyond personal goals to embrace the other’s persons opportunity and secure a joint benefit.

For regional shopping centres faced with the decline of traditional retail lease opportunities – this is a way of converting retail tenancy vacancies into long term profits and secure tenants. But it requires a skilful and different approach:

  • The lease can be re-negotiated. It is not carved from stone.
  • Recognition of risk for both sides and a preparedness to understand the other party’s perspective
  • The reality check that to fill space the rental budgets of yesterday will not do the job.
  • Sensitivity to the long-term benefits

If it’s raining, you take an umbrella. You do not waste time complaining about the rain ….  Food for thought?

Article contributed by Australian Retail Lease Disputes the retail lease specialists. See www.retailleasedisputes.com

 
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