Observations & Conversations
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Subleasing is becoming a bigger and bigger part of retail leasing, whether it’s unloading nonperforming space or leasing a store within a store. |
Back-to-school shopping wasn't so cool (or
profitable) for a lot of retailers, but you could have fooled me. I took my son
shopping at The Mall at King of Prussia for his school clothes and you would
have thought it was the day before Christmas. Yet, most retailers posted low to
no sales growth. Some chains saw better than expected growth, such as Circuit
City or Pier 1, but the Abercrombie & Fitch, American Eagle, Hot Topic, etc.
type chains aren't pleased. I read one analyst's reasoning for the teen-type
stores seeing slow sales is because their parents are worried about job security
and aren't letting the kids spend freely, but the same analyst noted that moms
and dads are buying cars and houses at record paces. Definitely confusing times.
My back-to-school shopping experience gave me some insight as to why some of
these chains are starting to sputter. I noticed my son wasn't so eager to shop
Abercrombie & Fitch or American Eagle. It seems logos anywhere other than on the
label are passe at least in his clique, but we did spend a lot of time and money
at Timerberland, which nullified the anti-logo theory. Within an hour of getting
home and my son unpacking his new “rags,” he "deconstructed" the pullovers by
ripping the collars... I should have taken him to Goodwill instead, but their
merchandise might have been too pristine for his taste. I don't think the slow
back-to-school sales are due to parents tightening the purse strings, it's more
of an over proliferation of teen stores, lack of "gotta have it" merchandise and
the fact that these chains cater to a clientele that few understand, just ask
any parent if they can grasp a teenager’s logic. (If they do, I wish they would
please write a book and I’ll buy three copies). While on the topic of parents
and children, take a look at this month’s feature article on babystyle.com, it’s
a roll-out in the brick and mortar form of a new retail concept that’s opening
its first store catering to moms-to-be. (FYI - Another new retail concept with
e-commerce origins is Just White Shirts.com, see page 27, a men’s and women’s
clothing concept with two stores in Canada that’s crossing the border into the
United States.)
There's one born every minute, a dumb idea that is. Talk about stupidity or
paranoia, I'm not sure which label best fits a fellow that called me about his
300-acre parcel of dirt with highway frontage in Whoknowswhere, Ohio. He wanted
to develop an entertainment project and called to pump me for leads on possible
anchors for the site. I gladly told him what I know, (it was a short
conversation), and suggested that an entertainment anchor might not be the best
use. He debated that his site was so close to an amusement park that a major
entertainment component made the most sense. Turns out, his site is five miles
from the amusement park, (I asked five miles as the crow flies or five miles on
a major artery? He said he didn't know.) Then he explained, the site is also
near a university... he didn't know how many students attended the university,
didn't know the population density, hadn't ordered demos, and didn't know the
traffic count but, more importantly, he didn't understand the relevancy of this
key information in determining what he should do with the site. He then said he
could develop it as a lifestyle center, so I asked him what's the household
income. He replied about $40,000, then he couldn't understand why it was too low
to attract the likes of Trader Joe's, Ann Taylor Loft, etc. But, I guess he's a
lot smarter than me or at least has a better gene pool, since he owned the site
free and clear. The lack of understanding wasn't annoying or stupid, that's just
a matter of getting a basic education of developing retail, since everybody has
to have a first time. It was when I suggested that he call 100 potential anchors
for the site that I lost patience (and anyone that knows who I work and live
with also knows that I have the patience of a saint). He refused to contact any
potential retailers about the site, because a competitor might steal his idea
and develop the property before he could... if it's a secret, why bother calling
me?
Last month I brought up the topic of subleasing and got a bit of an education
since then. I asked a broker friend, why such and such company can't unload some
of its surplus real estate although they're willing to subsidize the rent for
the entire primary term. He explained that three of the five locations in
question had securitized leases, which would require approval from every
investor and one of the leases had 100+ investors and no retailer would wait
that long to get approval. Further complicating it, the primary lease terms were
for less than seven years and, although they had options, the retailer that
guaranteed the primary term was unwilling to exercise the option nor continue
subsidizing the rent during the option and the sublessee would need to
renegotiate the rent with the investors... life's too short and so is the
primary term. Another problem with subleasing is coming up with a “fair”
brokerage fee. In one case, the space for sublease was 100,000 sq.ft. and the
retailer “on the hook” wanted to pay a commission of $5,000 to the broker that
brought in a replacement tenant for the entire space, and no the $5,000 isn’t a
typo. It’s becoming clearer and clearer as to why some of this space will remain
vacant for the life span of the lease. Subleasing is becoming a bigger and
bigger part of retail leasing, whether it’s unloading nonperforming space or
leasing a store within a store. However it’s apparent that a lot of lawyers and
financial gurus didn’t think it all the way through when they were writing
leases 10 years ago and I suspect the error of their ways will make negotiating
sublease clauses in new leases almost as unbearable as trying to work within the
confines of leases written a decade ago.
Also, in my last column I told you about our TenantSearch database of retailers
and that we were working on sending subscribers updates via email every time a
retailer was looking for sites in their market. Well, it's official and here's
how it works: go to http://tenantsearchontheweb.property.com/
and after you subscribe to the national, midwest, south, west or north regions
then click the button that says you want email alerts on expanding retailers in
the states of your choice and every time a researcher for TenantSearch/The
Dealmakers talks to a retailer that is looking in your market, you'll get an
email telling you what kind of real estate, store size and cotenancy is sought,
who to contact and how to reach them. I don't know of any service like this and
hopefully it will be the next great lead-generating tool since The Dealmakers,
so go to our web site and check it out.
This issue of The Dealmakers will be at the ICSC Midwest Dealmaking in Chicago,
so stop by our booth and say hello. Next week, we’ll be in Atlanta at the
Southeastern States Dealmaking, so if we missed you in the Windy City, stop by
and see us in Atlanta.
Until next month,
Ann O’Neal, Publisher