Retail Landlords Gain Upper Hand

Retail leasing experts say power is shifting to the landlords in the commercial real estate market as fewer concessions are being granted to retailers who come back to …

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Retail leasing experts say power is shifting to the landlords in the commercial real estate market as fewer concessions are being granted to retailers who come back to the negotiating table for new leasing terms. Analysts say renters have more power in secondary markets or when they’re commodities retailers who can prove they need a break to keep their businesses afloat, but renters in prime locations are finding more trying times at the bargaining table. This may be contributing to the continuing trend of renters who are signing leases for longer periods of time. For more on this continue reading the following article from National Real Estate Investor.

The era of retail tenants ruling the leasing market appears to have passed, retail real estate brokers say. While retailers in certain product categories and in smaller markets may still be pursuing rent concessions when negotiating lease renewals, in much of the nation negotiating tactics have returned to the status quo.

In addition to the general improvement in leasing fundamentals, the lack of new retail development over the past few years has made existing space more valuable, says John Bemis, executive vice president and retail market lead for the Southeast with real estate services firm Jones Lang LaSalle. That has meant that retailers with access to good locations don’t want to lose them when their leases come up for renewal.

“Concessions are definitely down, we are seeing a much smaller number of those this year and we are starting to see the length of terms on renewals starting to grow longer,” Bemis says.

For the most part, when requests for concessions do come in they involve commodity retailers such as electronics or book sellers and the tenants have to prove they need the concessions to survive for the landlords to consider granting some relief, he adds. Alternatively, retailers in rural markets and in class-C centers may have more leverage to negotiate better lease terms, notes Solomon Ets-Hokin, national chair of the retail services group with Colliers International.

“Retail is always a tale of multiple cities, not only across tenant classifications, but also across product [types],” he says. The same shopping center, for instance, could have multiple tenants clamoring to fill an outparcel pad with great visibility and few retailers willing to take a space with limited frontage just 200 feet away.

Overall, however, it’s now a landlord’s market. There are three kinds of tenants that can hope for concessions today: ones that provide a vital merchandise mix for the shopping center in which they are located; companies that could have a viable future; and retailer that can prove they need the concessions they are requesting, according to Bemis.

Long-term potential

When it comes to renewals, retailers are moving away from the trend of signing for the short-term only—three- to five years—and are more likely to renew for seven to 10 years, Bemis adds, in line with historical norms.

They may feel more comfortable exercising their renewal options now than in the past five years because they’ve gotten into the practice of considering all costs and benefits before deciding to renew. Ets-Hokin notes that they now look at sales levels at any given location and at relocation opportunities to figure out what makes sense before signing up for a longer-term.

“The retailers, prior to the Great Recession, were typically just exercising their options as written, at the stated price,” he says. “And post 2008, it became a very opportunity for [them] to negotiate better deals. You see much more discipline with option exercising; it’s much more about watching every penny.”

For example, a longer-term renewal makes more sense if they are planning to retrofit the store, according to Andrew Goldberg, vice chairman of retail brokerage services with CBRE. The good news for landlords is that “tenants are negotiating hard, but at the end of the day, they don’t want to give up their locations either,” he notes.

This article was republished with permission from National Real Estate Investor.

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