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Coming of Age

Specialty retailers sell everything from aromatherapy to yo-yos, and their stores range from pushcarts to temporary in-line locations. But these merchants do have one thing in common: they are a big hit with shopping centers.

Specialty leasing is an industry niche that has grown up in recent years. That maturity is evidenced by the waiting lists of prospective merchants, sophistication of leasing programs, and, above all else, a surge in revenues.

Specialty leasing has evolved into a multibillion-dollar industry. For the larger landlords, annual specialty leasing revenues produced by their portfolios range from $30 million to more than $80 million. "Years ago, centers looked at kiosks as being a minor part as far as a revenue source. Here we are years later, and they've become a very significant part," says Donna Condit, specialty leasing coordinator for MarketFair in Princeton, N.J. Specialty merchants at the 240,000 sq. ft. mall each bring in an additional $1,500 to $3,000 per month in mall revenues.

The two biggest assets that specialty tenants bring to a shopping center are increased revenues and greater diversity among the existing retail mix. "It's such a good income-producer for the developer," says Lon Conner, president of Waggon-Cellers Inc. in Amarillo, Texas. "You also have a lot more opportunities to introduce new products and get new people involved in the retail side of the industry. Malls often use the kiosks as business incubators to produce permanent in-line tenants."

Specialty leasing covers a broad category of retailers that sell their wares from pushcarts, kiosks, retail merchandising units (RMUs) or vacant in-line spaces. Retailers are often attracted to specialty leasing programs because of the ability to sell seasonal merchandise, test-market new products or expand retail coverage.

"More and more products are showing up on carts that merchandise better off of carts and kiosks than in an in-line location," Conner says. Merchants also are drawn to specialty leasing because it allows them to walk into a location with very little overhead and start selling immediately.

Professional programs Shopping center managers are recognizing that a strong infrastructure of support for specialty leasing entrepreneurs can multiply their own profits. As a result, landlords are working closely with merchants to help them improve business. Centers are upgrading the physical kiosks and RMUs, as well as providing business support such as with visual merchandising or testing more favorable locations within the mall.

"We really do have to help that entrepreneur" says Heidi A. Maybruck, director of specialty leasing for Glimcher Realty Trust in Columbus, Ohio. "Some of these merchants do not understand how to sell their product. We give them the tools, and we give them the opportunity."

Chicago-based General Growth Properties employs on-site specialty leasing staff to work with its tenants on a daily basis. General Growth assists merchants in writing a business plan and encourages them to enroll in business courses offered through local community colleges.

"There are business programs that we recommend to specialty merchants to make them a little more business savvy," says Mark Klockner, vice president of business development for General Growth. The specialty leasing programs at General Growth's 119 malls produce annual revenues of $60 million.

A commitment to specialty leasing is also evident at MarketFair, which recently upgraded its RMUs. During an extensive renovation, mall managers opted to replace existing pushcarts with larger RMUs. "We decided that we should go forth with an RMU that would be more feasible and provide more space to the actual merchant," Condit recalls. "We also wanted a unit that we felt could grow with the changes in the center."

Now MarketFair features six 10-by-10-foot RMUs and two 9-by-8-foot custom kiosks, both types considerably larger than the old 7-by-3-foot pushcarts. The larger size is also advantageous considering that MarketFair is limited in the number of RMUs it can operate under township codes.

Specialty leasing programs are also moving beyond the traditional mall setting to other types of retail centers. Glimcher introduced specialty leasing at some of its community center properties in 1998 as a means to fill empty spaces. Tenants ranged from fireworks sales to in-line Christmas stores. At the company's Daytona Plaza in Florida, managers were able to take advantage of specialty retailers selling goods related to the area's annual Daytona 500. "Our thinking is that if we can do it in a mall setting, we sure as heck can do it in a community center setting," Maybruck says.

Although Glimcher did not incorporate a significant marketing push with its introduction of specialty leasing into community centers, the company was surprised with the results - $150,000 in revenues during 1998. "It really is an untapped market," Maybruck says.

Glimcher plans to aggressively pursue specialty leasing opportunities among its portfolio of 100 community centers in 1999. The 21 malls in Glimcher's portfolio produce specialty leasing revenues that amount to tens of millions of dollars.

Tenant mix Finding the right mix of specialty tenants is one of the biggest challenges of a successful specialty leasing program. Those merchants need to add an element of excitement to the mall's common area yet not compete with any permanent tenants.

"Landlords have to walk a very fine line between supporting the specialty merchants and not stepping on the toes of the permanent tenants," Maybruck says. "Keep in mind that the permanent tenants are paying the big rents, and they are deserving of the permanent occupancy."

Most malls are pursuing a variety of national and local retailers that offer distinctive products and services. "We have to be able to provide something that sets us apart from other competitors, discounters, category-killers and the Internet," Klockner says. "We're forced to provide unique merchandise in our centers that shoppers can't get elsewhere."

MarketFair offers a variety of specialty concepts. "The units that you have in your center give the customer a direct reflection of what the center's image is," Condit says. MarketFair's national concepts include Margarita Republic, which sells Jimmy Buffett products, and Manhattan Gaming, which offers trendy products that range from Beanie Babies to South Park memorabilia. Local tenants feature a Princeton U store, which sells the school's logo merchandise, and Everything Silver, a jewelry retailer.

Specialty leasing can be the first step for some entrepreneurs in finding a permanent home at a center. "A lot of retailers that come in to operate in the RMUs have dreams of being in a store," Condit says. Specialty tenants that establish themselves can graduate into larger, in-line locations. Pipsqueak & Wilfred is one retailer that has been at MarketFair for five years. The toy store started out in a traditional pushcart and now has a permanent, 3,500 sq. ft. home.

The growth of the specialty leasing niche has sparked some unorthodox concepts. Seattle-based Shurgard Storage Centers is the first storage company in the United States to take advantage of specialty leasing opportunities with mall kiosks. Shurgard has opened seven mall kiosks in the past two years. The 10-by-15-foot kiosks typically feature computers to reserve storage units, as well as products displayed for sale, such as storage and package supplies.

"It's a great way to show and develop our brand in a different environment," says Bob Blauvelt, Shurgard's director of kiosk operations.

Shurgard's innovative concept has seen its share of challenges. "Initially, there were obstacles because we were totally different," Blauvelt says. But after two years, the response from malls has been very favorable, he reports. Shurgard has become a destination within the mall, and it does not compete with other tenants.

More sophisticated design Kiosk and RMU designs are continuing to advance beyond the pushcarts and generic square boxes. Units are becoming more like pieces of furniture, Conner says.

"Developers are proud to have them in the common areas because they add to the mall. They're not just an income producer," he says.

Recently, Waggon-Cellers created kiosks for the Fashion Outlet Mall in Nevada that were made out of old Cadillacs and checker cabs. "It's very eye-catching," Conner says. The company also is working on kiosk designs for the Aladdin project in Las Vegas that has a "Desert Passage" theme.

"The biggest thing in the past two years has been that developers, particularly individual mall owners, want carts that are customized to their center," says Bev Landdeck, president of Chariots Retail Cart Specialists in Tulsa, Okla. Developers are still looking for carts that are extremely functional and user-friendly for both the merchant and the shopper, yet they don't want something that is generic. For example, developers might request colors, shapes and designs that are customized to match the center's own interior design, Landdeck says.

Tony Horton, a consultant with T L Horton Design in Grapevine, Texas, points to the spurt of new development in recent years. "Kiosks designed for those centers have been more unique than those centers that have been in the portfolio for awhile," he says. One recent RMU design that Horton worked on for Copley Place in Boston features an illuminated glass display. The unit is designed to look like a glass case. The glass is open during the day, and because it is two-sided, shoppers can see merchandise on both sides. In addition, when the stand is closed at night, it is illuminated, and it becomes a display stand.

"Predominately, people are looking for function, form and design and pricing as the overall package," says Sharon Loeff, director of sales and marketing and a designer for Creations at Dallas. "Every developer has his own philosophy for what the common area should look like, and that's what sets the design into motion."

Michigan-based Taubman Centers Inc., for example, wanted a unique concept that also fit in with its upscale centers. One of the two custom units that Creations at Dallas created for the developer is a radius unit, which features an elliptical shape. "A lot of developers are looking for softer edges, and they no longer want the square or rectangular unit," Loeff adds.

Many developers are willing to pay for the new design features. A few years ago, developers were spending maybe $200,000 on a specialty leasing program for their portfolios. Now those same developers are spending millions of dollars on kiosks, Horton says. Typically, RMUs range in price from $5,000 to $20,000 per unit. "Developers are spending a lot more money on the product, primarily with the thought that they will last a lot longer," he says.

Function Despite increased emphasis on aesthetics, kiosks and RMU design must be utilitarian. In fact, the focus today is on designing units that are more user-friendly for both merchants and shoppers. "The bottom line is that even with all the fancy foo-foo that you can put on carts, they still have to be functional. People still have to be able to sell off of them," Conner says.

Storage and merchandising continue to be key design elements. T L Horton has incorporated pull-out drawers versus one large storage cavity into its RMUs in order to maximize storage space.

Another new design feature created by Chariots Retail Cart Specialists is a locking glass showcase built into the RMU. "It transforms a portion of the storage unit into display," Landdeck says. "So it's not only closing and locking the door for security purposes, but it also still displays the merchandise."

Both storage and merchandising have been made easier in recent years because units are bigger. Ten years ago, the standard cart size was about 3 by 6 feet. Today, most units are 4 by 8 feet or 6 by 10 feet once the shelving is added. RMUs will probably not grow much larger given the limited amount of common area space.

"The evolution of the equipment has been dramatic since the inception of specialty leasing," Loeff says.

Developers and retailers are now examining different formats to improve merchandising. For example, Creations at Dallas recently convinced Spencers Gifts that a more effective way of merchandising on larger units was to have staff working on the outside. "If you work from the inside, you can create a barrier to the customer," she says.

Developers also are opting to buy more individualized carts compared to a dozen carts that are all identical. The goal is to purchase carts that have custom fixtures to accommodate different merchants such as hard goods, soft goods or jewelry.

"Developers are seeing that if they can custom-fit the unit to a national company, they can keep that company on year-long contracts. They don't have to keep re-leasing the unit," Landdeck says.

Design flexibility continues to be a growing factor. Many of the carts produced today are built so that the accent colors can be changed as the color scheme within a center is updated. "Centers should be able to upgrade colors and accents to meet architectural needs without having to buy all new units," Landdeck says.

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