Retail Owners Using Tight Market To Protect Themselves If Economy Sours

Brick-and-mortar retail is back in favor after a pandemic that locked shoppers out of stores and an e-commerce growth spurt that kept them at home.

But even amid historically low vacancy and rising rents, retail property owners — wary of recession indicators — want to ensure they don’t once again fall victim to surprise mass closures.

Now that they finally have the upper hand, landlords are scrutinizing tenants more than ever, speeding up deals and imposing new lease terms, industry players said at Bisnow’s New York Retail Conference on Tuesday.

“It’s the landlord's responsibility to manage the risk. Will that tenant still be around doing the sales volumes they're doing for the 10-year term that we're signing them up for?” Retail by Mona Vice Chair and Head of Retail Strategy and Advisory Virginia Pittarelli said onstage.

“You make decisions on whether there's a lot of longevity behind them and they're going to open more stores, or are they not going to last 18 months.”

Despite a spree of bankruptcies, the national vacancy rate held at 4.3% at the end of the fourth quarter, according to Colliers. Move-ins exceeded 91M SF, the highest level since the second quarter of 2022, as move-outs slowed and the number of expected closures faded.

Although leasing activity fell 17% in the fourth quarter, retailers absorbed more than 11M SF, assisted by muted construction activity, according to Colliers’ report.

The lack of space has put pressure on retailers looking to expand, Kimco Realty President and Chief Investment Officer Ross Cooper said during the event, held at 20 Times Square.

“If there's a bankruptcy that occurs, there's a frenzy of retailers that are trying to do package deals,” Cooper said. “It's clear that we have a lot of momentum in our ability to push rents and to push other terms outside of just the economics of the deal.”

Sprouts Farmers Market is among the grocery store chains with ambitious growth plans, seeking to expand its footprint to more than 1,000 stores nationwide. It operates about 480 stores in 25 states. 

But the retailer had fallen behind its publicly stated store-opening targets in 2023 and 2024. To quell investor fears, Sprouts asked Kimco how they could get more deals done, Cooper said.

“We said you need to move faster, and you need to be more aggressive,” Cooper said.

The tenant executed five new leases within 21 days. Kimco has done similar package deals with Skechers, T.J. Maxx and Ross Dress for Less, he said.

Madison International Realty Head of Leasing Sunny Choi said she is negotiating two leases for tenants that want to be open by the holiday season. The clock is ticking on building out the space.

“The landlord can use that as leverage to tell the tenant you've got to hurry up and finalize this lease,” Choi said. “If a tenant is aggressive, that's always a good sign, and that's music to my ears, because that helps lease the other vacancies.”

Tenants are also communicating more with each other in order to find space. 

Dave's Hot Chicken Head of Real Estate Development Anne Goldman said that on Labor Day, she received a text from a Popeyes franchisee offering six sites. Dave’s took two of them. 

At another location that Dave’s was interested in, there was a french fry restriction — only the shopping center’s Shake Shack could sell them. So she contacted her counterpart at the burger chain to help renegotiate both leases and allow the chicken shop to move in. 

“We know we're synergistic. We're not going to have the same consumer every single day, but it's a good collaboration,” Goldman said. “From a retailer standpoint, I am much more in the ear of my counterparts than I have ever been.”

The median lease-up time has reached a historical low of less than seven months, with prime spaces filling in less than five, according to Colliers.

That directly translates to financial savings. The Feil Organization Vice President of Retail Leasing Randall Briskin said the average downtime cost to turn over space equates to between two and three years of rent. 

“If you start to analyze what that really means to your net effective rent and you keep losing tenants, it's not a pretty picture,” Briskin said. 

With tenants having fewer options, landlords can impose terms to shield themselves from such losses. Tri State Commercial Realty Vice President Richard Babeck said the last 10 deals he has done have included the terms surrounding customer acquisition costs, meaning that if the tenant leaves early, it would have to cover the landlord's brokerage fees and tenant allowances for its replacement.

Others require that tenants provide sales figures, whether for the store they are opening or their business as a whole, to ensure the tenant is stable.

Tenants are more often requesting a five-year lease with two five-year options as opposed to a standard 10-year guaranteed term. To account for that, Briskin will tie sales volumes to the additional lease option, forcing a tenant to stay if they are doing a certain amount of sales. 

“This is all coming out of the pandemic,” Pittarelli said. “It's really just a little bit of an insurance policy.”

That insurance policy is especially helpful as storm clouds appear on the horizon. Some economic models, such as Moody’s, place the probability of the U.S. entering a recession in the next 12 months as high as 49%.

Although consumer confidence has remained higher than expected, middle-class households are increasingly pulling back, searching for discounted alternatives. Surging energy costs and gas prices since the U.S. and Israel launched attacks on Iran are also driving shoppers to be more cautious.

“Some [tenants] are definitely going through some tough times,” Briskin said. “There's going to be a shakeout.”