Making Good Real Estate Deals in Difficult Times
Real estate experts offer advice on how to maneuver in the current market.
The current climate is putting even more pressure on franchisees to squeeze efficiencies out of one of their biggest operating expenses: real estate. At the same time, those franchisees that are continuing to forge ahead with new growth need to weigh site selection decisions very carefully.
The National Retail Tenants Association recently sponsored a panel discussion where industry experts offered insight on what’s ahead for the retail sector in 2010. The panel also provided advice for tenants on how to best maneuver in the current climate. “We saw unprecedented financial stress for most of retail—including landlords—last year,” said Bernie Schachter, senior vice president of real estate at Staples, the Framingham, Massachusetts-based office supply chain. Even though most retailers are happy to have 2009 behind them, 2010 is shaping up to be another challenging year, he added.
Although economists believe the U.S. economy is on the road to recovery, franchisees are bracing for a long, tough climb out of the deep recession in the months ahead. “We think a lot of things are tied to job recovery, and we don’t see that happening in 2010 or even into 2011,” said Andy Graiser, co-president of DJM Realty, a real estate consulting firm with offices in New York, Chicago and Los Angeles. The national unemployment rate reached 10 percent in December, up from 7.4 percent the previous year. “Regardless of job growth, the consumer has really changed their buying patterns. So, there will continue to be downward pressure on rents all over the country,” Graiser added.
Negotiating better deals
Retail tenants are being opportunistic when it comes to leasing space in the current market. They are making low offers and waiting out landlords. “Some retailers are waiting to see what happens as more good real estate comes on the market in the next year,” Schachter says.
More store closings are anticipated for 2010. In comparison to last year, when large retailers such as Circuit City and Linens ‘n Things shuttered hundreds of stores, experts anticipate that smaller retailers will be hit hard with closings in the coming year. Some prospective tenants are waiting to see what happens in the aftermath of those closings in terms of market rents, as well as the availability of prime space.
Tenants have been finding success in renegotiating more favorable terms on existing leases. A popular technique that tenants are employing to obtain lower short-term rents is to “blend and extend” a current lease.
The “blend and extend” option allows tenants to sign a lease extension that offers a lower rent today with rent increases as the term of the lease progresses. That can be a win-win for both the landlord and the tenant, because it gives the tenant the needed rent discount in the short term, while allowing the landlord to keep the tenant and recoup some of that rent over the term of the lease.
It also is important for franchisees to recognize that not all landlords are willing— or able—to offer rent reductions. Some landlords do have financing constraints on the property, which requires lender approval on new leases or lease renewals. So it may be important for a tenant to work with the landlord and the lender on lease negotiations.
In addition, landlords that are on solid financial footing appear content to ride out the storm rather than offer steep rent discounts. For example, some shopping center owners are willing to sit on empty space for a year rather than doing a deal that reduces the rent 30 percent over the next 10 years, Graiser noted.
Site selection strategies
Despite the challenging climate, some retail and restaurant brands are pushing forward with new store development. “There is expansion activity, but probably less than half the volume we have seen compared to years past,” Schachter said.
Hot franchise concepts such as Red Mango remain on a fast growth track despite the recession. The frozen yogurt concept recently announced that it had inked 42 agreements in 2009, which will result in 219 new locations. In addition, companies that deferred new store openings last year are now obligated to move forward with openings in 2010.
Brands that are continuing to expand need to carefully reevaluate site selection strategies in light of current market conditions. For example, franchisees who typically follow on the heels of new development will need to alter their strategies given the dramatic decline in construction.
The big boxes such as Target and Walmart, which fueled expansion in recent years, have dramatically reduced or stopped new store growth entirely. New retail growth is being driven by demand for value-oriented retailers such as T.J. Maxx and Ross Stores, as well as dollar stores, drug stores and strong electronics retailers such as Best Buy. More importantly, there is almost no new construction, and new shopping center development is not likely to return until 2011, Schachter added.
So what kind of criteria are retailers evaluating when it comes to plotting new expansion? Certainly, brands are keeping a close watch on local employment numbers. Another key indicator is watching where other retailers are struggling. For example, retailers are closing stores in areas of Atlanta, Phoenix, Florida, and Northern California. Retailers are gravitating towards strong markets, as well as the strong trade areas or strong properties within a particular market. “Most markets seem to be flattening out, but there is a definite flight to quality effect,” Graiser said.
Tenant Strategies to Reduce Rent
• Full disclosure of financial and operating information
• Seek a cost reduction for multiple stores
• Involve all landlords and all stakeholders in negotiations
• Do your homework on the landlord and the market
• Concealing information
• Refusing portfolio-wide solutions
• Being inflexible or unrealistic
• Going back to the landlord for reductions more than once
Source: DJM Realty