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the shopping center: how is it different?

The Shopping Center: How Is It Different?

A recent IREM survey found that shopping centers are the most management intensive and complicated properties to manage. Why do property managers find shopping centers to be so difficult to manage? This article will discuss the difference between shopping centers and other types of property. The differences start with the development of the shopping center.

Development

Shopping center design and configuration is a reaction to the trends in retailing. Centers have evolved as a response to the needs of the retailing industry, which in turn responds to the needs of the consumer. From the 1930s to the 1970s, centers evolved from neighborhood centers, to community centers, to regional and super-regional malls.

Since the early 1970s, we have witnessed development of the specialty center, the off-price center, and, recently, the power center and the auto care center. The next stage is the development of shopping centers anchored by the hypermarket.

One of the major differences between developing shopping centers and other commercial properties is that center development is always driven by major anchor tenants. A neighborhood, community or regional center cannot be developed without an anchor tenant.

The major tenants are the primary traffic draw for the center. They enable the center to lease to smaller tenants who rely on this traffic flow for business. The anchor tenants also enable the center to achieve a higher rental rate from the shop tenants. Major tenants are aware that the developer needs them and are able to negotiate a lease that is usually just a breakeven deal for the developer.

In a neighborhood or community center, the developer will often either sell the major tenant a parcel of land, lease the land at a very favorable rate, or lease a building at par to the anchor tenant. It is not uncommon for a department store to receive its parcel of land free as an inducement to anchor a regional mall.

The developer's willingness to make these deals indicates the importance of the major tenants to the success of the shopping center. Major tenants also exercise control over the remodeling and expansion of the center. The common area agreements grant the anchor tenants approval rights for remodeling and expansion of the center. The developer's profits come primarily from the small shop space and the pad tenants.

A shopping center is very susceptible to the impact of its competition. The value of a shopping center can be dramatically reduced if the major tenant vacates. This can happen to a center with a 30,000-square-foot supermarket which now needs a 45,000-to-50,000-square-foot superstore to be competitive. The loss of the anchor tenant or the subleasing of the space by the supermarket to a tenant who draws substantially less traffic, such as an auto supply or fabric store, is potentially devastating to the center.

Cities and counties have ambivalent feelings toward the development of shopping centers in their communities. Their primary concern is the traffic the centers will generate on city streets and highways.

On the other hand, cities and counties tend to look favorably upon centers for the sales taxes they generate. A 100,000-square-foot center with sales of $150 per square foot and a municipal sales tax of 5 percent will generate $75,000 in sales tax. A regional mall of 1 million square feet with sales of $250 per square foot and the same sales tax rate will generate $12.5 million in tax.

Though shopping centers are vulnerable to the trends in retailing, today they are the number one investment choice of institutions. A center that is properly designed, in a good location, with strong anchor tenants, and the proper tenant mix has a high probability of continued success. A successful institutional-grade, neighborhood or community center will sell with cap rate between 7.5 and 8.5 percent, while a successful regional mall will command a cap rate as low as 4 percent.

The community

Shopping centers are the only property types that depend upon the community for their continued success. Community acceptance is based upon the center's location, major tenants, tenant mix, and the relative strengths of the competition. The wrong tenant mix or superior competition will greatly reduce the traffic to the center, thus reducing tenants' sales, increasing tenant failure and turnover, increasing vacancies, and reducing rental rates for releasing.

In many communities, the shopping center has replaced the downtown retail area and has become a focal point of community life. "I'm going to the mall" is a common household expression. The courts have recognized this and have extended the public rights to free speech to include shopping centers' common areas. Many shopping centers provide a community booth as an area for the groups to gather signatures on petitions and to disseminate information.

The shopping center is a primary resource for entertaining and educating the community. Promotional activities range from Santa's arrival, to arts and crafts shows, merchandising events, health fairs, and bridal shows. Many malls provide a community room for groups to meet. These activities are designed primarily so the community will accept and patronize the shopping center.

Merchants' associations

and advertising fund

The shopping center is the only property type where the owner and the tenants join to promote their businesses. The owner and tenants contribute dues to the merchants' associations or advertising fund. The owner or manager and tenants work jointly to promote and advertise the center through the merchants' association, while the manager controls the activities of the advertising fund.

The community and regional malls will have a promotional budget in the $75,000 to $300,000 range, while the neighborhood center will have a budget between $10,000 and $30,000.

The lease

Since the success of the tenants determines the success of the shopping center, the shopping center lease contains provisions that directly impact the tenants' businesses.

The shopping center is the only property type where a majority of the tenants have a percentage rent clause. Percentage rent, or overage rent, is charged based on a percentage of sales above a predetermined sales volume in addition to the minimum base rent and may have a major impact on the property's cash flow and value. This rent is charged in addition to the minimum base rent and can have a major impact on the property's cash flow and value.

The manager wants to be sure that all tenants are maximizing their sales. The following clauses are not typically found in other property types' leases:

* The continuous occupancy clause requires tenants to remain open and states which hours they must be open for business. The owner not only wants the rent to be paid, but the success of the center's tenant mix is dependent upon each store being open and having uniform hours.

* Another clause requires tenants to submit monthly sales reports. The owner has the right to audit tenants' books to assure that sales are being reported accurately.

* The radius clause protects the sales in the center by preventing tenants from opening a similar business within three to five miles of the center.

* The lease may require the tenants to spend 2 percent to 3 percent of their sales on advertising, to advertise in the center's tabloid, and to belong to a merchants' association or advertising fund.

* The use clause specifically limits the type of product or service tenants can provide. For example, a restaurant use clause will state the type of restaurant, e.g., Mexican restaurant, whether or not liquor is provided on premises, and if the food is self-service or table service. A shoe store will state the type of shoes - children's, women's or athletic shoes.

* Tenants, especially major tenants, may place lease restrictions on the owner. An "exclusive" provides tenants with the sole right to sell a product or provide a service. Major tenants may restrict specific uses within so many feet of their premises.

Leasing

Unlike other properties, where leasing is designed primarily to fill a rent roll with financially qualified tenants, a shopping center's leasing plan is designed to create a tenant mix that fosters synergism among the tenants. The idea of a tenant mix is to mirror a department store where a broad range of merchandise and services is provided.

The tenant mix is influenced greatly by the major tenants. If the major tenants are a supermarket and a drug store or home improvement center, the center will be a convenience center. If the center is anchored by department stores, the center will have a fashion mix. If the major tenants are Nordstrom and Saks Fifth Avenue, the center will be medium-to high-fashion. If the major is K mart or Sears, the center will be occupied by tenants with popular-to medium-priced goods and services.

The demographics of the center's trade area will determine the tenant mix. It is not unusual for the property manager to turn down a tenant who is willing and able to pay the asking rent because the tenant's use or merchandise price range is not right for the center's trade area.

A unique leasing opportunity exists with a temporary tenant program. A temporary tenant leasing program can fill vacant space, enhance the center's tenant mix, and generate additional income. During peak selling seasons, specialty tenants will lease space at high rental rates for a short period.

Lease renewals are not a foregone conclusion at a shopping center. An existing tenant is not automatically renewed even if its rent is current and financial statement acceptable. Each tenant is carefully reviewed in light of sales performance, contribution to the center, and place in the tenant mix. If a tenant's sales are poor, it may be replaced with one that has a greater chance of paying percentage rent.

Of all the criteria used in developing a leasing program, none is more important than the needs of the slopping community. The merchandise mix and the tenant's price points must be a reflection of the trade area, or the center will not succeed.

Tenant relations

While tenant relations are important in all types of properties, they take on special significance in shopping centers because of the interdependence between owner and tenant.

The property manager needs to develop a working rapport with each tenant. This is critical in promoting the center, evaluating the tenants' contribution to the tenant mix, monitoring the tenants' performance, and developing the leasing plan. The property manager should visit each tenant monthly.

The tenants' abilities are the basis of their success. The center's tenant mix and the manner in which the center is operated and promoted will have an impact on tenants' success or failure. Tenants are aware of this and can be critical of the center's management. Because many of the tenants in neighborhood and community centers are local merchants and some are first-time operators, there is a tendency among some tenants to blame the center if they fail.

A tenant may request temporary rent relief to help get through a difficult period. The request may be granted because of the tenant's contribution to the center's mix, high vacancy, or a soft leasing market.

The property manager must develop and enforce the center's rules and regulations as outlined in the lease to provide convenience for the shopper, to promote the center, and to protect the center's aesthetic qualities.

Many merchants feel justified in violating these rules to promote their businesses, and the property manager must be sensitive when enforcing the center's rules and regulations while maintaining a good working relationship with the tenants.

Conclusion

The tenants and the shopping center use the same criteria to determine their success, the performance level of tenants' sales. Tenants' sales directly affect the center's income. Centers with high sales will command premium rents; centers where tenants' sales are marginal will suffer with low rents. The level of sales also determine whether or not the center will achieve percentage rents.

In no other property is the tenant's and owner's level of success so dependent upon one another as in the shopping center.

Richard F. Muhlebach, CPM [R], CSM, is president of TRF Management Corporation, Bellevue, Washington. He is a member of the faculties of IREM, the International Council of Shopping Centers, and the Northwest Center for Professional Education. He has also taught real estate at the college level. He received the JPM Article of the Year award in 1983 and 1984 and has published articles in the Journal of Real Estate Development, Shopping Center World, Buildings, and National Mall Monitor.

Alan A. Alexander, CPM, CSM, CRE, is president of Alexander Consultants in San Bruno, California. He is a member of the IREM national faculty and the Academy of Authors, has written several articles for JPM, and was a contributing author of the IREM book Managing the Shopping Center. He is also a frequent speaker at ICSC programs, including Idea Exchanges, the Annual Convention, Management and Institutes, and the University of Shopping Centers.

PHOTO : Newer power centers with nontraditional anchors still require careful interaction between manager and retailers to attract customers and build sales.
COPYRIGHT 1989 National Association of Realtors
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Author:Muhlebach, Richard; Alexander, Alan
Publication:Journal of Property Management
Date:Jul 1, 1989
Words:2179
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