Higher Vacancies May Be Hurting The Landlords, But It Is Also A Great Dealmaking Opportunity For Discounters And Off-Pricers

This column, Strolling the Agora, will continue to be written as the mood hits, even though Shopping Center Digest has ceased publication.

By Murray Shor

Considering the stubborn, low level of consumer confidence caused by the continuing high unemployment rate, it is no surprise that vacancies have been increasing all around the country, and that some retailers are focusing on Canada where there is a more positive emergence from the recession.

However, selective dealmaking is picking up here in the US in disparate locations as a result of the depressing numbers. Especially for brokers in prime metro areas, the opportunities are there.

First the bad news: According to the market research company Reis Inc, which tracks these data, the vacancy rate at shopping centers in the last quarter rose to 10.9%, the highest level since ’91, and closing in on the record 11.1% set the year before. The rent asked by landlords dropped almost 20 cents per sq. ft. to $19.07, but the effective rents are even lower, $16.58.

For the larger malls, where average rents are hovering around $38, vacancies rose only .2% to 8.6%, down from 9% the previous quarter.

Now The Good News

O.K., now the good news. With the cutbacks from high-end and full-price retailers—who are the foundation of fashion-oriented malls and the CBDs of major cities—there is an accelerated push from the discounters and off-price retailers: TJMaxx, Target, Nordstrom Rack, Syms and its recently acquired Filene’s Basement (now called fbSY), H&M, Century 21. According to one dealmaker “They consider this a great opportunity for discount deals in prime locations they could never afford before, and to reach affluent consumers who shunned them in the past.”

A prime example, of course, is Wal-Mart Stores, which will be opening dozens of smaller units of 30-60,000 sq. ft. in cities around the country, eventually rolling out the concept of focusing on food and consumer basics to hundreds of these units. And then, who knows?

These promotional tenants have greater access than ever before to luxury- and designer-branded merchandise because vendors have excess inventory and limited outlets for distribution. One estimate is that the number of top designers now selling to TJX Companies has jumped 25%. The off-pricers and discounters, therefore, are buying this top-quality merchandise, and using it to draw in customers in new stores along New York’s Fifth Avenue—and even Harlem—Chicago’s Miracle Mile, Beverly Hills, and maybe even Rodeo Drive. Certainly in the plushier malls in Las Vegas, they’ve been operating for some time now.

Educating The Affluent

These merchandisers are educating their new, fashion- and trend-oriented customers that they can continue to buy quality and at a cheaper price, and strengthen customer loyalty for the future, when the economy—hopefully—returns to what we consider normal. In the meantime, they have locked-in prime real estate at discounted prices—though they may be paying some of the highest rents they have ever paid before--and helped tear down the old barriers blocked them from locating in the A and A+ plus malls, or fashionable locations in some of the most prime urban centers. Though they much prefer long-term deals, in some instances they are willing to settle for six months, with options and some built-in increases.

These stores could be considered “pop ups”, which are becoming a more common trend.

As we’ve pointed out several times in the past, these locations are becoming more common, and the type of deal that appeals to both landlord and tenant. For the landlord, it provides a rent-paying tenant in a vacant store, that can be converted to a long-term tenant, either this retailer or another, perhaps even a competing merchant, at the expiration of the short-term lease. For the tenant, an inexpensive way to test a new concept, polish and refine the presentation, and react to feedback from customers before rolling it out in a mass expansion. Or kill the concept before it does too much damage.

And, of course, they are ideal for retailers that can exploit special events or holidays: Halloween, Back To School, Presidents Day, etc.


Other Interesting Activity

Dollar Tree says it will buy Canadian retailer Dollar Giant for about C$52 million, adding 85 units to its 3,961 stores in 48 states. VP of leasing is Todd B. Littler, (757) 321-5283, tlittler@dollartree.com .
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GNC Acquisition Holdings is planning an IPO to raise some $350 million to add about 4,800 company-owned and franchised vitamin and herbal supplement shops; future plans are to expand to China. The Pittsburgh-based chain’s website is www.gnc.com , 1-800-766-7099.
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Loblaw Companies is launching The Mobile Shop in more than 500 of its supermarkets across Canada in a bid to become a major retailer of mobile phones. Contact Maria Forlini, VP-Telecom, (905) 459-2500, www.loblaw.ca .
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Gymboree Corp, which operates some 650 children’s apparel stores, has accepted a bid to be acquired by Bain Capital for $65.40 per share, or about $1.8 billion. Director of real estate is Kathleen Hinkley, (415) 278-7993, Email: Kathy Hinkley@gymboree.com .
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Investors are being drawn to a number of real estate investment trusts that are outperforming most stock market offerings, especially those involved in shopping malls, office building and apartment buildings. In our industry, the top performer is Taubman Centers Inc, which during the third quarter returned 18.5%.