Most retailers are bidding a fond farewell to 2003, which they hope will go down in history as a transition from bad times to good. They're also embracing what they expect to be a promising new year.
An unscientific Retail Traffic survey of retail execs backed up by phone interviews reveals high expectations for 2004. According to the survey, 94 percent see sales growing in 2004 and 61 percent expect to open more stores than last year. Only 18 percent anticipated opening fewer stores next year.
What's good for retailers, though, isn't especially good for mall owners. Many chains, fed up with increasing rent and CAM charges, are considering moving to lifestyle centers or freestanding locations. One-third of the 33 retail executives responding to the survey said high occupancy costs would be the biggest obstacle to growth in the coming year.
“Landlords' asking rents have consistently exceeded increases in the cost of living…and tenants are asked to shoulder an increasing amount of occupancy costs,” says Karl Ehrlick, director of leasing for Ben Bridge Jewelers. “As a result, many upper to moderate fashion tenants are moving out of malls into lifestyle centers.” Ben Bridge, which operates more than 70 stores in 11 western states, is looking at malls and centers as it expands into the Houston market and Chicago and Minneapolis. The chain is owned by Berkshire Hathaway, Warren Buffett's company.
The Bombay Co. also is troubled by rising occupnacy costs. “Mall operating costs are increasing,” says William Matso, vice president of real estate. “That's why we are moving off-mall.” He says the furniture chain is increasingly seeking space in lifestyle and strip centers, especially those where other home furnishings stores — such as Bed Bath & Beyond and Pier 1 — attract the same kind of customer.
Claire's Boutiques Inc., for one, is entering new lease and renewal negotiations with a vow to only locate where rents are the most reasonable. “If rents continue to climb as they have we may pass on some of the projects being built and if we have to close some stores due to high rent increases, we will do that too,” says Scot Marsh, vice president of real estate, east, for the accessories chain, which has 2,875 stores in malls, lifestyle centers strip centers and on city streets. One way Claire's is keeping costs down is by negotiating fixed CAM costs.
“We will look at new projects of all kinds being built in all markets,” especially where there is a juniors contingent such as Old Navy and Gap, says Marsh. The retailer is looking at small, high-volume stores. “With an average sale of $10 to $12, we need to ring that register a lot to make these deals work.”
It's not just malls that may lose tenants. Todd Andrews, spokesman for drugstore chain CVS, continues replacing strip center locations with freestanding stores. “We're looking for corner locations in the 10,000- to 12,000-square-foot range and adequate parking,” Andrews says.
The median cost of occupancy for non-anchor space in mid-market malls was $40.98 a square foot in 2002, according to ICSC's The Score: Shopping Center Operations, Revenues and Expenses guidebook. CAM and other non-rent costs can make up as much as one half that figure. To allay tenants' increasing discomfort with variable CAM charges, many landlords, including General Growth Properties, Developers Diversified Realty and Westfield America are instituting fixed CAMs in many leases.
Though chains are fighting occupancy cost increases, Carol LaPorta, vice president of Merle Norman Cosmetics, says many developers can be inflexible on rates and still find retailers to take those spaces. But some retailers think developers, particularly those with B and C class properties, will have a harder time.