Why Retail Owners Are Adopting Shorter Term Leases

Retail is becoming more focused on the shopping experience than ever before. While this has big implications for retail brands and operators, it also puts pressure on retail owners to adapt the physical space and curate tenant mixes that will drive consumer traffic. One new trend: Landlords have adopted shorter lease terms and fewer options for tenant renewals. With the rapidly changing retail environment, landlords want and need options to remain competitive.

“The landlords today have to understand who their customer is and their core customer, and once they figure that out, they have to make sure that the retailers that they have are relevant,” Craig Killman, EVP at JLL, tells GlobeSt.com. “A lot of landlords aren’t giving tenants options anymore because retail is changing so fast and they don’t want to give retailers control over their real estate longer than the foreseeable future. We are seeing a lot of trends where terms are getting shorter and there are no options. Landlords are paying really close attention to customer amenities outside of the retail shops, like soft seating, koi ponds and play areas. The landlord is aware that they need to give the customer a reason to hang out at the shopping center.”

Shorter lease terms leave the power in the hands of the landlord for the long-term. Today, retail sales volumes are trending down, but retail price per square foot is trending up. That shows that owners taking the lead are finding success. “There is a real estate guru based in Chicago named Sam Zell, and one of his famous quotes is ‘retail isn’t overbuilt, it is under demolished,.’” Adds Killman. “There is a lot of retail out there that is irrelevant.”

With shorter leases come many other changes in the retail sector. First, experience-focused environments require a more hands-on property management strategy. “The more relevant retail environments have onsite property managers,” says Killman. “The managers stay close to the trends about what is relevant, see what is working and can be recommending to their landlords as to what they need to do to get out in front of the early adopter wave so that the retail shopping environment can stay relevant.”

Additionally, the capital markets will also have to evolve and adapt to shorter-term lease structures. In the current market, landlords have more flexibility to set terms, because the market is so healthy. However, in a down market, short-term leases may be harder for capital markets sources to accept. “In core assets, the owners are in the captain seats,” says Killman. “There is a lot of money that wants core assets, and the cap rate compression is still very low for those assets. Let’s skip forward 36 months or 60 months when we are in a downturn in the economy and consumer confidence has slipped. Now, some of the money sitting on the sidelines has left, and the landlord now sees that it is more of a buyer’s market. No one wants to leave money on the table. Right now, any shift in the capital markets side is going to take a shift because the landlord isn’t going to bring a cap rate above 4.5% because there is enough cash sitting on the sidelines for core assets.”