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Going Full Circle

The challenge for leasing kiosks — unlike in-line mall space — is that you're not dealing with long-term leases. In fact, in many cases you have to find not just one, but two, three or even more tenants for the same space year after year after year. That can create a lot of paperwork for a tiny amount of square footage within a sprawling retail property.

Sure, there are perks to this model. Everyone wants space during the all-important holiday shopping season and during other big retail stretches — such as the back-to-school season. You can charge premium rent for those months. But the reverse is true in slower months, when you might have to scramble to fill kiosks during sleepier seasons. (It certainly doesn't boost a mall's image to have empty carts lining its common areas.)

As a result of this conundrum, specialty leasing pros came up with a novel sales pitch: convince temporary tenants — even seasonal ones — to sign year-long leases. You'd have to charge lower rents during the holiday season than if you were using the premium rent model. But at least you'd be sure to have rent coming in every month. Furthermore, specialty tenants could lock in preferred spots.

“This is no longer a seasonal business,” says Deborah Georgetti-Piro, senior vice president of Main Street, the Mills, a Simon Company. “Now it's a year-round business not only for the retailer, but the developer.”

Some temporary tenants jump at this opportunity. The ability to lock in rents and a location turns out to be a pretty good deal. But it also raises a new dilemma: If you're a summer retailer, what do you do in the winter? Find a retailer with complementary sales patterns and share the cart.

For example, Dan Mancuso, vice president of specialty leasing at Youngstown, Ohiobased Cafaro Co., is in talks with a vendor looking to sign a year-long lease. The vendor plans to carry discount sunglasses between February and October, before switching to personalized Christmas ornaments for November and December. Beginning in January, it would start the transition back to sunglasses. Overall, Cafaro operates 150 retail merchandising units (RMUs) at 14 malls across the United States.

It's also this sort of thinking that has led to pairings like the one between Metuchen, N.J.-based sunglasses manufacturer and retailer NYS Collection and Towson, Md.-based power tools manufacturer Black & Decker Corp. NYS Collection operates more than 1,000 RMUs in the United States.

Specialty Retail Report publisher Patricia Norins estimates that 15 percent of specialty leasing tenants are engaged in some form of co-tenancy today, up from just 2 percent several years ago.

“Retailers are becoming more savvy and changing out products to keep them in the same location year-round,” says Georgetti-Piro. Franklin Mills, a 200-store outlet mall in Philadelphia, operated by Indianapolis-based Simon Property Group, is one of the centers where NYS Collection switched its product offering from sunglasses to Black & Decker items.

For 10 months out of the year, it pushes its goods. But November and December are slow months for sunglasses sales. So to boost activity at its kiosks, NYS hawked nearly a dozen Black & Decker products at 200 kiosks this past holiday season.

“We have to do it to survive,” NYS Collection co-owner Sal Babbino said. “Companies like mine are looking to working with other companies to allow us to survive on a cart year-round. We're looking for someone to take over some of the liability.”

Drill down

What appealed most to NYS Collection about carrying the Black & Decker line was the fact that NYS Collection would be able to swap out its slow-selling sunglasses and boost sales during the high-traffic, high-sales and high-rent holiday period. Babbino says Black & Decker seemed like a good fit based on data indicating almost half of Americans had bought a power tool as a present and it was the No. 1 brand purchased as a gift. On the flip side, for Black & Decker, NYS's kiosks offered the internationally recognized brand a way to roll out products quickly on a large scale.

But it's more than a marriage of convenience. Babbino says adding products that sell better than sunglasses during the holiday shopping season is a necessity — since it helps offset rising rents on kiosks. According to Babbino, rents for RMUs have increased 5 percent to 7 percent annually — outpacing sales growth during the same period. (Overall, Specialty Retail Report says specialty leasing has grown from $10 billion in sales in 2002 to $12 billion in 2007.)

For developers, moving to a year-round model also saves time and money. About 60 percent of Mills's Outlet Centers' temporary tenants are now operating on one-year or longer leases. Each of Mills's 17 centers averages 50 RMUs.

Cart economics

At the Mall of America, Lisa Taylor, specialty leasing manager, says she's seeing a growing number of vendors changing out products during certain times of the year. At the Triple Five Group-owned superregional mall in Bloomington, Minn., there are as many as 71 RMUs, with rents ranging from $42,000 per year to $58,000 per year.

Although Taylor declined to state how much the Mall of America generates in rents from its specialty leasing program, she says even the smallest centers in the U.S. can make $1 million to $1.5 million and it goes up from there depending on the size of the shopping center.

She explained that the vendor's break point is 18 percent. So for a cart costing $42,000 to rent annually, the vendor's sales goal would be $233,000. If and when they exceed that sales goal, she says, the vendor owes the landlord 18 cents on every dollar in revenue over that amount. Vendors can get discounts by signing longer-term leases. Other factors that determine rent include the traffic at the property, number of RMUs within the center, the uniqueness of the product offered and the neighboring tenant mix.

All things being equal, when looking at a long-term lease versus a short-term lease, landlords, including CBL & Associates Properties, say it only benefits the landlord to embrace the vendor who is looking to commit for the longer term.

“We see value in working with tenants that are willing to sign longer-term leases, providing the center with uninterrupted rental streams and limited business interruption,” says Jeff Gregerson, vice president of specialty retail at CBL & Associates. How much of a discount would it offer? Gregerson says, “It is substantial enough to get their attention.”

At CBL & Associates' 84 malls, Gregerson says, there are anywhere between 10 and 30 RMUs; and of them, 70 percent are leased for three months or more. For example, he noted that at one center where there are 25 RMUs, 20 are leased year-round, leaving five available for rental for part of the year.

Shopping carts

Contributing to the profitability of a specialty leasing vendor is the design of the RMU. Mall owners typically contract with the designers and manufacturers of point-of-purchase displays, carts and kiosks to produce RMUs that are consistent with and complement the center's overall design.

As specialty leasing has extended beyond two or three holiday periods during the course of a year to year-round, Creations at Dallas has integrated durability and flexibility into the designs of its fixtures.

“One thing we strive to do is design, engineer and manufacture a unit that is versatile enough to accommodate a broad range of products,” says Alex Goldfarb, regional director of national sales for Creations at Dallas.

He added, with RMUs use becoming year-round, the Dallas-based manufacturer is using 14-gauge steel to enhance their units' quality and durability. For example, the firm has produced units for Simon for use all year.

Among the various merchandising elements Creations at Dallas and Carrollton, Texas-based Stak Design RMUs offer are puck walls and waterfalls, from which vendors can hang a variety of merchandise, and roll-up glass showcases for watches and jewelry that can be secured, yet kept visible to passersby.

“Our job is to provide the developer a merchandising platform that will enable the retailer to generate sales, which in turn translates to rent for the developer,” says Rob McCoy, principal at Stak Design. “Take the higher rents that developers are looking to justify, [RMUs] can offer a unique way to display retailers' merchandise.”

The cost of RMUs varies widely, from $10,000 to $25,000 and up, depending upon the décor of the center, its complementary finishes, size and potential uses.

Last year, Stak Design sold an estimated 1,000 RMUs to mall owners and landlords,down as much as 15 percent from 2005, with the decline of new properties under construction.

Cafaro's Mancuso agrees that the number of centers under construction has slowed. However, as developers renovate their existing centers that too generates additional RMU opportunities.

“When we look at renovating a mall, we evaluate whether we should be purchasing new RMUs as part of the renovation,” says Mancuso. “The demand is there and the principals of the company recognize the return on investment.”

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