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Long before the coronavirus pandemic, owners of shopping centers began focusing on ways to reimagine their properties to maintain their vibrancy over the next decade and beyond. As outlined in an excellent article by Greg Maloney, President & CEO of Americas Retail at JLL, this involves balancing short term considerations, like occupancy rates, with longer term interests.
Shopping behaviors are rapidly changing. The pandemic instantly advanced e-commerce penetration by 4-6 years, meaning the consumer of 2025 is here today. Property owners need to kick their transformation plans into high gear even sooner than planned.
A major piece of this puzzle is tenant mix. At a macro level, there may be big reductions in the percentage of a center’s square footage devoted to retail since Mixed Use developments — where people can shop, work, play and sleep — continue to grow in popularity. At a micro level, if less space is devoted to retail, property owners can (and should) be much more selective about which retailers they want in their centers. If a mall needs to trim its roster of specialty apparel retailers in half, for example, which ones are most desirable?
The attractiveness of a tenant will depend on several factors. One is the popularity of its brand. Is it a perennial favorite, an up and comer, or one whose best days are clearly behind it? Another is the strength of its balance sheet and its access to cash. A third factor is the range and sophistication of its omni-channel capabilities. How many years have they had “click and collect” (also called BOPIS) up and running? How long have they offered same-day delivery? There are other considerations too.
Here is where things get interesting. There is another factor — one that nobody is thinking about — that deserves serious attention too. Is the retailer using RFID in its stores? The ones who do are far more valuable tenants than comparable ones who do not.
As explained in an earlier article, RFID boosts inventory accuracy. It also improves a retailer’s in-store and e-commerce capabilities in other ways. There is nothing new about it. Target, Lululemon and Zara all made these upgrades years ago. Retailers who sell apparel and fashion accessories are the ones to focus on first, since these are the product categories where it has taken root quickest.
Getting From Here To There
Despite an increase in public skirmishes and litigation between landlords and tenants, we are also seeing more cooperation than ever. And there are a range of different bargaining chips on each side of the table.
Many retailers want rent relief, in the form of deferrals or outright forgiveness of past rent obligations, plus reductions of future obligations. They also want to reduce the size of their store fleets, often dramatically. And while bankruptcy is not the panacea it often seems to be, for many retailers it still provides a plausible route to achieving these objectives.
Property owners have traditionally valued the certainty that comes with long-term lease commitments. But things are not always as they appear. There have often been instances where it served the landlord’s interests for a tenancy to end several years early, even when the retailer was not in default.
As if the waters weren’t already muddy enough, equity investments in certain tenants are being contemplated by property owners, like the acquisitions of Forever 21 and Aeropostale. While it might be tempting to think of these as bailouts, this can also be a shrewd investment.
The Bottom Line
Owners of shopping centers have their own mortgages to be concerned about. Any decisions to release tenants from obligations surely won’t be taken lightly. But given the precarious financial position of many of these tenants — particularly ones in hard hit, highly discretionary categories like apparel and accessories — landlords may need to make bold decisions sooner than they may have wished.
Before determining a course of action, they should consider whether a tenant has modernized its store fleet with RFID.