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Tenant Retention: An Exercise In Awareness

To attract and retain successful tenants, landlords must understand the tenants' needs before the door is opened.

During the last several years the entire retail industry has witnessed company consolidations, bankruptcies, shifts in ownership structures and changing consumer preferences. As a result, the traditional strategies for attracting and retaining tenants have to a large extent become outdated.

For example, tenanting decisions have historically been based upon financial feasibility, as well as on the influence of personal relationships, the ability to "leverage" deals from center to center and the entrepreneurial heartbeat at the core of the industry. Today, corporate expansion/contraction plans and "canned" research department decisions are increasingly important for tenants and landlords.

The changing marketplace and informational demands make it necessary to revamp the old rules and create more inventive tenanting strategies.

Selling the future and the past Strategies for leasing space to new tenants must be refined depending upon whether the center is planned or existing. For example, for a planned center, the leasing agent must be able to sell the future and the potential prosperity of both the tenant and the landlord. (Of course, coughing up tenant improvement dollars and rent abatements always helps.) In an existing center, landlords can use a history of tenant performances and expense records to help seal a deal.

Renewal leases require different tactics, depending upon the profitability of the tenant. If its tenure has been at least reasonably profitable and there are no mitigating factors, renewal negotiations should be relatively painless. However, if the tenant has not been profitable, the negotiations will be far more difficult.

Before negotiations for a renewal begin, the landlord must ask itself several questions: * Is the tenant viable for the long term? * Does the tenant have the right merchandise for the center? * Does the tenant add, detract or do nothing for the overall merchandise mix of the center? * Is the tenant in the right location?

If, after answering those questions, it makes sense to keep the tenant in the center then negotiations should begin.

Critical considerations In the same way that the landlord considers the health of the tenant during negotiations, the tenant considers the health of the center. From tenant mix and operating costs to marketing and security, the tenant has critical issues that must be understood and addressed by the landlord.

Is the tenant mix balanced? To ensure that a tenant mix is balanced and that neighboring tenants can contribute to the success of a potential tenant, the landlord must review a few key questions on a regular basis.

* What are the anchor tenants? Are they the leading anchors in the market? Are they appropriate for the market? Are there opportunities to upgrade the anchor lineup?

All shopping center owners have learned during the last few years that there are winners and losers in the department store wars. The hard-fought battles are not over, but the field is clearing, and, in most cases, the victors in any market can be identified.

As department stores reclaim their former status as shopping destinations, having the winners in place or on the way will be important to the specialty stores that depend upon the residual traffic. The age-old question of whether a leading department store truly helps the smaller tenant is moot; more traffic is better, no matter how it is sliced.

* What specialty stores lease in the center? Are they today's leading retailers? Is the center's merchandise mix exciting and diverse, or is it diluted by an overabundance of similar concepts?

Consumers are increasingly fickle about specialty retail, and, as a result, a retailer's expected life span is getting shorter. Landlords must be able to identify the retailers that provide value and customer service, develop and maintain brand identity and know their customers. Once the retailers are in the center, the landlord has a story to tell at lease renewal time.

Do temporary tenants enhance in-line business? The landlord wants to be able to sell the mix and well-being of its tenants, including those of its temporary tenants. An aggressive temporary tenant program helps maximize center revenues, but it is essential for the landlord to keep a careful balance between temporary and permanent concepts.

The in-line stores are the ones paying all the rent and extras; when a lease is up for renewal, the landlord does not want to answer tenants' questions regarding cart locations or merchandise. For example, how does the landlord respond to the jewelry store tenant that wonders why there are four jewelry carts or kiosks, and one in front of its store?

Temporary tenants should enhance rather than infringe upon existing in-line tenants. The landlord must ensure that: * the program includes complementary retail concepts; * the concepts are located strategically rather than haphazardly; * presentations are visually appealing and do not resemble flea markets or "going out of business" sales.

Is occupancy affordable? Occupancy cannot be a losing proposition for the tenant, and the landlord must know going in what it will cost a retailer to do business in the center. Although the criteria for analyzing tenants' health is not black and white -- to some degree, it depends upon the success of the center and good business acumen -- the Occupancy Cost Relationship (OCR) can assist landlords in determining the long-term viability of a tenant.

The OCR is the proportion of occupancy costs to sales per square foot. Specifically, it is calculated by comparing the sum of base rent, common area costs, taxes and insurance to the tenant's sales per square foot.

Typically, those costs should not be more than 15 percent of the tenant's sales per square foot. If the OCR is higher than 15 percent, it becomes increasingly difficult for a tenant to make a profit. However, some tenants can tolerate higher OCRs; for example a jewelry store usually can afford a higher OCR than an apparel merchant.

In very productive centers where overall sales are high, a higher OCR will be more palatable for tenants. On the other hand, in centers where sales are marginal, the landlord must be aware that, without help, tenants will be less inclined to renew their relationship with the center.

Although landlord costs such as taxes and insurance are relatively uncontrollable, others such as maintenance, housekeeping, security, landscaping and administrative expenses should be examined thoroughly if the center suffers from high occupancy costs.

Managers should use "best practices" in the course of operating their centers and keep the balance of efficiency, cost effectiveness and maintenance standards. Tenants cannot be expected to pay an ever-increasing load; and the more expenses are kept in check, the more rent a tenant can afford to pay.

Does center marketing promote sales? Strong national retailers with huge advertising budgets are usually reluctant to pay into a landlord's media fund or a marketing association. It is their belief the company's own marketing efforts will bring people into the centers where their stores are located.

That sentiment appears to be gaining ground, even among landlords. For example, some landlords see marketing as a means of positioning their centers as community hubs; they want to promote their centers as the top choices for community events, and the occasions generate additional traffic and sales. Others use marketing only for events such as Santa's arrival or the Easter Bunny's welcome; and still others regard marketing as nothing more than a frivolous operating expense.

In order to turn the marketing program into a tool that promotes sales growth and leasing, landlords need to use three elements in their planning.

Research Center and marketing managers often convince themselves they understand their shopper and trade area because they are in it. In reality, this closeness to the situation can keep them from seeing changes around them.

Therefore, it is important to conduct extensive, objective research, and, as a general rule, the more the better. The landlord must know who shops at the center; where the shoppers come from; shoppers' purchase patterns; demographics; trade area and market share.

It also must know what the competition is doing; whether new retailers are planning to enter the market; and whether the existing competition is upgrading or declining. In addition to pinpointing strengths and weaknesses, knowledge of the competition assists landlords in deciding when to approach tenants in advance of their lease maturity.

Sales analysis Analyzing sales requires more than looking at a sales report and asking certain tenants or categories of tenants why they think sales went up or down. Landlords need to be diligent in understanding their tenants' sales and in using that information to better target their marketing programs.

For example, landlords can work with tenants near percentage rent to see what sorts of events might highlight those tenants. More successful tenants will want to maximize sales, and the poor performers will be interested in sales- and traffic-generating events. ("Sales-generating" and "traffic-generating" are not always synonymous; if the choice must be made, landlords should focus on the former.)

Trends analysis Shoppers have patterns and habits. Using up-to-date research and center-specific sales information, the landlord can tailor its marketing program to take advantage of current trends and stay abreast of likely changes. By the way, Santa and the Easter Bunny should stay, especially if the center hopes to build its image as a community gathering place.

Is the center secure? Landlords thinking that a highly visible security presence somehow "admits" to a problem and subsequently scares merchants and customers are sleepwalking. If the perception is that crime exists within a center, and if the perception is not handled quickly in an obvious fashion, customers will abandon the center, and tenants will strongly voice their dissatisfaction.

Retailers and their employees are as much a center's customers as the shoppers. Everyone should feel safe.

Landlords should make security visible; provide the security staff with customer service training; require the staff to learn the names of store employees; provide associated services for merchants such as employee background checks and after-hours escorts. The landlord's employees and tenants spend a lot of time in the shopping center; that time should be safe, comfortable, productive and profitable.

Although other strategies for retaining tenants exist, the tenant mix, occupancy costs, marketing and security issues are, for the most part, well within the landlord's control. They should be the main focus in preparing for tenant negotiations.

Filling centers with newer and better concepts is, and will continue to be, a difficult task. Being able to retain existing, profitable tenants will be the difference between a successful center and a mediocre one.

Virgil Bonifazi is executive vice president, management, for Heitman Retail Properties, Chicago.

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