June 24, 2010 / 9:50 PM / 9 years ago

U.S. retailers flex muscles wrestling landlords

NEW YORK (Reuters) - U.S. retailers still have the upper hand when negotiating leases for stores in malls and shopping centers, retail industry executives and other experts told the Reuters Consumer and Retail Summit this week.

Retailers, only now beginning to recover from the sharp downturn in consumer spending in the last two years, have been winning rent reductions as leases come up for renewal from landlords facing the prospect of empty stores.

Case in point: OfficeMax Inc OMX.N has played hardball with its landlords, taking advantage of the fact that 60 percent of its roughly 1,000 store leases are due to expire over the next two years.

“In 2008, we began a program of going proactively to our landlords and saying ‘Look, we may have to close this store — if we can’t get a concession, you may have a vacant building,’” OfficeMax Chief Operating Officer Sam Martin said.

In the past 18 months, OfficeMax has won “several million dollars” in rent reductions and has seen landlords eager to kick in months of free rent and to help spruce up the stores, Martin said.

Yet, tenants must abide by their lease terms that often forbid closure of stores. Landlords have grown less willing to allow tenants to shutter stores prior to a lease expiring, even if the tenant is willing to pay to get out of a lease early.

“The ability for a retailer to go to a landlord and say ‘I want to close 50 stores’ is not there,” said Matthew Katz, global retail practice leader for restructuring advisory firm AlixPartners. “That may have been there 15 months ago. It’s not there today.”

Landlords are more concerned that they’ll have no tenant to fill a space. An empty store may violate lease agreements with other tenants and the landlord’s loan covenants.

“If the primary motivation is keeping the lights on and having occupancies so you don’t have domino effect closures... that landlord is much more motivated by having that tenant remain,” said Nina Kampler, executive vice president of Hilco Real Estate, which advises retailers wanting to close stores. “There’s not any price tag in the world which will be a work-out-able deal.”

When they do sign new leases, retailers are now more apt to rent less space.

OfficeMax has been opening locations within stores operated by other companies, such as grocery or drug stores, which attract a steady flow of customers.

“We open into a Safeway SWY.N, it instantly has traffic,” Martin said. “There are significant economic benefits associated with the Safeways and the Food Lions of the world.”

OfficeMax has no plans to open new big box stores. That could be bad news for big box shopping center owners, such as Developers Diversified Realty Corp DDR.N, which has been working to fill big box stores left vacant by the bankruptcies of tenants such as Linens ‘n Things and Mervyns since 2008.

Well-financed retailers are gravitating toward better located, more highly trafficked malls and shopping centers, widening the rental rate gap between these centers and giving retailers more power in the weaker centers.

“We are finding more flexibility in the ‘C’ locations and the ‘B’ locations,” said Matthew Rubel, chief executive of Collective Brands Inc PSS.N, whose shoe store chains include Payless ShoeSource and Stride Rite.

“In aggregate, we are able to get mid-teens (percent) reductions in our rent on those renewing stores,” Rubel said.

Reporting by Ilaina Jonas and Phil Wahba; Editing by Tim Dobbyn

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