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Retail Tenants Less Insistent on Rent Concessions as Market Conditions Improve

Retail Tenants Less Insistent on Rent Concessions as Market Conditions Improve

Rent concessions are playing less of a part in retail leasing negotiations, at least compared to two years ago.

Helped by rising retail sales and an improved sector outlook, landlords now have more of a choice about whether to grant new and existing retailers months of free rent or let them forgo common area maintenance (CAM) charges. And tenants have become more circumspect about asking for them.

As recently as 2010, many tenants were still expecting rent reductions when discussing new leases. In turn, landlords were worried about violating occupancy provisions and were willing to go the extra mile to keep vacancies from spiking up, according to John Bemis, executive vice president and director of leasing with Jones Lang LaSalle Retail, an Atlanta-based third-party property management firm.

Now, with the average vacancy for 2012 projected to fall to 9.2 percent and effective retail rents forecast to rise 1.2 percent on a nationwide basis, according to Marcus & Millichap Real Estate Investment Services, most of the necessary corrections in the marketplace seem to have taken place. Owners of good quality properties no longer need to worry about violating occupancy clauses or falling into default.

What’s more, leftover vacant spaces from retailer bankruptcies at class-A and class-B centers are being snapped off the market, even if at rates that might be lower than peak, notes Thomas H. Maddux, principal in the Baltimore office of KLNB LLC, a commercial real estate services firm.

“Things are clearly better for landlords than they were a few years ago,” Maddux says. “But there is still quite a bit of opportunity for tenants who are active and interested in doing new deals.”

According to Bemis, “The pendulum is currently still on the retailer side, but it’s beginning to swing back.”

Getting a break

The key to how much leverage tenants have in leasing negotiations now comes down to the credit-worthiness and risk profile of the tenant and the strength of the center.

Good credit national tenants looking to lease new stores and perhaps offering the landlord an opportunity to rent out additional locations in the future stand a reasonably good chance of getting some perks in exchange for signing a deal. Today, those perks will most often take the shape of the landlord funding a full build-out of the store, or providing the tenant with the equivalent value in free rent or a tenant improvement allowance, according to Mez Birdie, director of retail services in the Orlando, Fla. office of commercial real estate services firm NAI Global.

On the other hand, retailers that are just starting out and don’t have a proven track record or those that are clearly headed for bankruptcy/liquidation might have a hard time convincing landlords they are worth the extra expense when landlords now have a better chance of securing replacement tenants for their centers.

“Expectations for ‘goodies’ at lease-signing for well-rated retailers are high and are necessary for owners to remain competitive,” says Tim Henry, senior vice president with SRS Real Estate Partners, a retail real estate services firm. “For smaller, less capitalized companies, the perks are fewer because the risk is higher to the landlord.”

That’s also why tenants at class-C centers or centers that face a lot of competition stand a better chance of getting concessions than those at high-quality properties or at properties that serve as dominant centers for very wide trade areas, according to Bemis.

“A lot of this depends on where the property stands in the matrix,” he says. “If this is like Westgate Mall in Amarillo, Texas, which is the only mall for 100 miles around, you are going to get much fewer concessions. But if you are in a second mall in a small town, you can drive a harder deal. A retailer in a situation like that can drive a little bit of free rent, a TI allowance and maybe a percentage rent deal.”

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