Spot Needs of Trend-Setting Tenants That Are Weathering Downturn

A commercial tenant's negotiating power very often depends on its size. This is especially true about tenants who are “big-box” stores—for example, Wal-Mart, Sears, or Target. But a new trend, the opening of big-box “concept stores,” has commercial owners hopeful that they can do business with big-box stores, without as many tenant-friendly, owner-overpowering lease terms.

While owners may initially think that they will have more lease bargaining power with concept stores—which are scaled-down versions of their parent big-box stores—because they will occupy a smaller space, this probably isn't true. However, owners willing to compromise on that point could reap more benefits from a concept store than a smaller, less demanding tenant.

Likewise, if you are open to the idea of leasing space to “untraditional” tenants that, if not for owners lowering their prices to prevent vacancies, could not afford great, traditional space in shopping centers, you might get a bigger, more diverse group of shoppers.

A New Concept May Work for You

When dealing with lease negotiations for concept stores, be just as tough as you would be with a big-box store. Don't be surprised at the amount of leeway concept stores will want with their leases, either. In fact, from a big-box parent store's point of view, a concept store will need even more favorable lease provisions, precisely because it isn't an anchor tenant located in a large, prime location that draws many customers. It might fail quickly, needing to leave the space it is renting from you with no lingering lease liability.

In the current climate, all types of tenants have some leverage because owners are desperate to fill spaces, but big-box concept stores are especially powerful. On a good note, according to New York real estate attorney Jacob Bart, the big-box parent company's reliable credit is a plus for owners, and its brand name draws shoppers to the center they occupy. But on the downside, credit-worthiness and popularity will give a concept store even more leverage. Bart comments that owners may not be happy about entering a lease with terms that allow a “trial basis” for concept stores owned by parent companies that are taking a chance on them.

Essentially, big-box stores negotiating space for their concept stores are looking for flexibility, Bart notes, so that if the stores fail, there is a reduced level of consent they must get from the owner for things such as sublets or assignments of the space to another tenant.

Big-box stores also are working other provisions, commonly seen in their own leases, into their concept store leases, such as early termination clauses, which allow a tenant to pull the plug on a commercial lease without a penalty when it wants to or needs to. “The ideal scenario for a tenant,” says Thomas F. Stewart, a California real estate attorney, “is a long-term lease with lots of extensions and the option to get out any time.” Here, if a concept store is profitable, it can enjoy the space for a long period of time. Conversely, an unsuccessful concept store has an “out.”

Unlikely Tenants Fill Space Where Stores Likely to Go Dark

Concept stores are not the only new trend popping up during a tough economic time for commercial real estate. In the past few months, untraditional tenants have been filling traditional commercial space.

As major chain stores like Circuit City and Linens ‘n Things close their doors, the expansive vacant spaces they once occupied go unused, and quickly become unprofitable for owners that, as a result, now are resorting to renting the spaces to some very untraditional tenants—many of them state-run or private organizations, rather than big-box stores. In fact, even some churches, such as Calvary Chapel in Phoenix, Ariz., are taking advantage of these now empty high-profile storefronts. Leasing to a commercial tenant that has always dreamed of setting up shop—literally—in retail anchor space at a high-traffic shopping mall is becoming the quick solution to dark storefronts and impatient lenders.

Prior to the economic downturn, churches, nonprofits, swap meets, and car dealerships, just to name a few types of tenants, couldn't possibly afford to move into a former Circuit City location with spaces in the ballpark of 100,000 square feet. But commercial real estate prices for big-box space are plummeting, allowing some tenants to rent great space they otherwise couldn't afford.

With the International Council of Shopping Centers predicting that it will report approximately 73,000 commercial closures during the first half of this year, you're likely to see—and take advantage of—big-box buildings being renovated by untraditional tenants. Consider New Jersey's Willingboro Town Center, which leased 60 percent of its formerly retail space to small offices. The center is now anchored by the state's Division of Youth and Family Services, which occupies a 22,000-square-foot corner, formerly a Sears.

Insider Sources

Jacob Bart, Esq.: Partner, Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, NY 10038-4982; (212) 806-5400; jbart@stroock.com.

Thomas F. Stewart, Esq.: Partner, Downey Brand LLP, 621 Capitol Mall, 18th Fl., Sacramento, CA 95814; (916) 441-1000; tstewart@downeybrand.com.

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