Retail Tenants are Using Innovative Strategies in the Recovery

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From digging deeper into site selection to rightsizing locations, retail tenants are discovering many ways to survive and thrive in the current economy.

The “Commercial Real Estate Show” this week took a look at retail tenant strategies and revealed some surprising and impressive statistics for the retail industry. The show’s experts shared many tips to help retail tenants make the most of their leases and protect their interests.

Retail is making a bold comeback, as retail sales and sales per capita are now above their pre-recession levels even with the 7 million jobs lost in the recession, said Chris Macke, senior real estate strategist at CoStar Group Inc.

Budget-conscious consumers have boosted sales at dollar stores, warehouse clubs and discount retailers like Ross and Target, said Katherine Field Boccaccio, senior editor at Chain Store Age. At the other end of the spectrum, luxury retailers like Neiman Marcus, Coach and Tiffany & Co. are experiencing tremendous success, she said.

Retail has had two years of positive net absorption — almost a full year more than office and industrial sectors, Macke said.

Historic lows in new construction are helping push vacancy rates down across the nation and rental rates are starting to inch up in a few markets. But in most cities, it’s still a great time to be a tenant.

“If you feel confident in being able weather today’s current economic uncertainty, lock in today's rates by signing long-term leases,” Macke said. “In effect, today we've got a sale going on retail lease rates.”

Our panel of experts explored best practices for tenants.

In an effort to reduce overhead and boost their bottom line, many retailers are opting for a smaller footprint and finding success. Rightsizing is a very viable option, says Boccaccio.

“If you cut your underperforming stores you've also got to shave your underperforming merchandise and execute lean, mean personnel and headquarters teams,” Boccaccio said. “It's these retailers that are going to survive despite what happens in the economy.

Savvy retail tenants are also striving to reduce their triple net (NNN) charges, said Mez R. Birdie, director of retail and investment services at NAI Realvest. Triple net charges are what the tenant pays toward taxes, insurance and common area maintenance expenses in addition to rent.

“Controlling them directly impacts their bottom line, so most retailers are focusing not only on reducing rent but also reducing the NNN charges,” Birdie said.

One of the hottest topics among tenants these days is a landlord’s financial viability and how to protect themselves in a landlord foreclosure.

Tenants signing a new lease should make sure it includes a SNDA if possible, said Jon Neville, a partner at Arnall Golden Gregory LLP. The SNDA (subordination, non-disturbance and attornment agreement) helps protect the tenant from having to leave if the lender takes over, he said.

Neville recommends including a request for the SNDA in the letter of intent since it is much more difficult to ask for one later.

“For existing leases, it's more the Wild West and you have to figure it out as you go along keeping in mind that a reasonable lender is not going to kick out a tenant that is productive and is not in default,” Neville said.

If things do go bad, tenants need to remember to read their lease and check with their lawyer before making any rash decisions, experts said.

Tenants are becoming increasingly savvy in site selection. In addition to using web-based GIS software to identify the best new locations, they are evaluating other existing tenants in the potential properties and considering possible co-tenancy clauses.

This show provided very interesting insights into retail tenant strategies. If you haven’t heard it already, the show is available for download here.

Michael Bull, CCIM
Show Host, Commercial Real Estate Show

President, Bull Realty, Inc
800-408-2855 ext 2001