The Changing Dynamic Between Retail Landlords and Tenants
The relationship between retail real estate landlords and their tenants has seen a shift in the last few years since the height of the recession. Itís not enough to just make sure a shopping center is fully leased. For long-term stability, shopping center owners need to have the right mix of tenants and adapt to the new economic and consumer realities of the times. Cheryl Todd, vice president of real estate management at Southern California-based commercial real estate services firm Coreland Cos., told us about the changing relationship between retail owners and tenants and how successful shopping environments are managed today.
GlobeSt.com: Has the relationship between tenants and landlords changed since the recession?
Cheryl Todd: I believe it has. During the recession tenant retention was the No. 1 priority. Tenants had the upper hand as both owners and retailers alike were just trying to stay above water. Thankfully, a much more collaborative relationship exists today. Overall, tenants are healthier and many are expanding, which has allowed landlords to regain a bit of negotiating power, or at least even out the playing field. I see landlords re-engaging with their tenants and trying to better understand a tenantís business to foster a stronger tenant mix.
GlobeSt.com: So are landlords more conscious of how they curate a shopping center?
Todd: Landlords are focusing on overall tenant synergy. An improved economy has encouraged owners to evaluate the tenant mix a bit more critically. There is likely at least a tenant or two in each neighborhood shopping center that is paying below market rent †or negatively impacting the health of the centeróa tenant with poor payment history, one that does not comply with a signage or parking program; or a tenant with a weak merchandising mix, for example.
Retail trends are rapidly changing. It is more important than ever that community shopping centers offer a unique destination that give consumers a reason to stay. Whether it be unique restaurants that drive nighttime traffic, entertainment options for weekend crowds, or a quality mix of daily needs that bring a steady stream of daytime traffic. There will be a lot more focus on the synergy of the tenants and the overall shopping experience.
GlobeSt.com: How does a property management team provide value when it comes to curating an ideal tenant mix?
Todd: A property managerís primary role is to be the landlordís daily representativeóan ownerís eyes and ears. Maintaining strong tenant relations requires constant interaction and a keen awareness of the health of each of your tenants. This in-depth understanding of each tenantís business enables ownerís to make strategic decisions that contribute to the overall long-term success of the property.†
We have always prided ourselves on the fact that we lie awake at night worrying about our properties as if they were our own. Our Coreland teams focus on providing a strategic approach to management with in-house asset management expertise that allows us to think critically and strategically about the operational demands, tenant health and long-term viability of each property.
GlobeSt.com: I assume that day-to-day operations of a shopping center and the pursuit of the ideal tenant mix likely play a big role in renewal negotiations?
Todd: The renewal process really starts the first day a tenant moves in. Tenants must be evaluated throughout the term of their lease, and not solely when they are up for renewal. Tenant sales are something to be closely monitored, not just reported. Sales should be tracked and analyzed. This information is critical as you enter renewal negotiations and evaluate the tenantís contribution to the center as a whole. You are always more willing to negotiate lease terms with a good, well-known and well-respected tenant who contributes positively to the environment. †You need to evaluate the cost of re-tenanting versus the true net effective of renewing a tenant at a slightly lower rate.
GlobeSt.com: Are there other factors that play a big role in landlord-tenant negotiations?†
Todd: Leases can always be improved. Are there rights in the lease that you would like to take away? Are there clauses that you would like to add? Look closely at CAM (common area maintenance) exclusives because you might be in a position to increase the centerís revenue by eliminating a CAM pool exclusion, for example. There is always room for interpretation, so a renewal is the perfect opportunity to firm-up, clarify and flush out the language.††
At the end of the day, a landlord is still going to work to get the tenant they wantóthe tenant that is the best fit for the center. In todayís market we are seeing both sides making valuable concessions to get a deal to the finish line.
GlobeSt.com: Tenants seem to be concentrating more on the experiential aspects of their business in order to battle e-commerce. Are shopping-center owners doing that as well and having success?
Todd: In certain locations, yes. As it relates to neighborhood retail centers, owners are focusing more on the quality of daily needs services that the tenants provide to the surrounding community. Those are things that are not achievable over the Internet. You canít get your nails done on the Internet. You canít get your hair done on the Internet. Larger mall settings or outdoor shopping centers can justify larger capital expenditures to enhance the environment with elements such as music, lights or other forms of entertainment. Either way, each owner we work with is focusing on the appropriate aspects of the property to enhance the overall experience.†