Wednesday, January 7, 2009

Struggling Retailers Press Struggling Landlords on Rent

--market turmoil provided retailors with the clout to haggle for lower lease rates from landlords --landlorders, like General Growth Property, suffered primarily from debt load, pressure on rents and vacancy added to their woes. --the pain of landlords will result default on com mortgaes, adding to the strains on banks. Retailers, having just struggled through one of the worst holiday shopping seasons in recent memory, are now trying to share the pain with their landlords. Many stores are pushing to negotiate lower rents, warning that they mightn't be able to make it unless their costs are cut. Those in stronger positions are finding that the market's turmoil has provided them clout to haggle for lower lease rates. "It's the best of times [because] landlords are trying to hold on to people like us," Gap Inc. Chief Executive Glenn Murphy told investors on a recent conference call. The rush for concessions threatens to sap U.S. mall and shopping center owners' cash flow at a time when many are struggling to refinance debt coming due and cope with mounting store closures. General Growth Properties Inc., for example, the country's second-largest mall owner, has warned that it will have to seek bankruptcy protection if it can't renegotiate new debt terms with banks. While General Growth's problems are primarily due to its huge debt load, pressure on vacancy and rents are adding to its woes. Investors have been bracing for the worst. A Dow Jones index that tracks the stocks of 22 retail real-estate investment trusts has fallen 44% during the past 12 months. Last year " was a capital-market crisis, and '09 will be a crisis of cash flow" for retail landlords, said Suzanne Mulvee, an analyst for real-estate research firm Property & Portfolio Research Inc. The list of retailers angling for concessions is long. Office-supply chain Office Depot Inc. confirmed that last month it hired Gordon Brothers Group's DJM Realty division to help it close 112 of its 1,275 North American stores and haggle with landlords for concessions on others. Women's apparel retailer Chico's FAS Inc. has hired consultants to help it renegotiate, renew or end 340 of its leases coming due through 2011, according to the company. Pier 1 Imports Inc., a furniture and décor seller that has had sales declines for several years, now is seeking to win lower lease rates on the 200 leases that it has coming up for renewal in the next year, the company says. And Gap, a mainstay in many U.S. malls, has gained more negotiating leverage in its monthslong effort to shrink many of its 3,190 stores. The apparel chain wants to cut its 40 million-square-foot portfolio by 10% to 15%, mostly by reducing the size of its stores and, subsequently, the rent they pay. Colliers Retail Services Group, a division of brokerage Colliers International, recently helped franchisees of a women's gym chain gain a 50% cut in rent for six months at five locations. In exchange, the tenants allowed the landlords to add one or two years to their lease terms, said Pat Duffy, chairman of Colliers' retail brokerage. Landlords struggling with empty space from retail bankruptcies and contractions are particularly vulnerable to demands from their remaining tenants. A high vacancy rate or the loss of one or two anchor stores can doom a mall, because shoppers and new tenants go elsewhere, experts say. The Loma Vista Shopping Center in Las Vegas has gotten clobbered already in the downturn. Two of the center's four anchor stores -- Steve & Barry's LLC and Mervyn's LLC -- are closing as the chains liquidate in bankruptcy court. Last year, Loma Vista's landlord, Afton Pacific LLC, of Los Angeles attempted in vain to keep the center's Steve & Barry's open by lowering its rent to $16 per square foot from $19 in exchange for canceling a $400,000 construction allowance it had agreed to provide for the store. Now with the holidays over, Afton Pacific is ramping up its marketing of the Steve & Barry's 25,000-square-foot site. Steve Boss, a Afton Pacific partner, sees new tenants requiring sweeteners to close a deal. "To get folks to commit to new space now, you have to make some concessions," Mr. Boss says. Vacancy rates for malls and shopping centers in the 76 largest U.S. markets rose to 8.3% in the fourth quarter from 7.8% in the third, according to a survey set to be released Wednesday by market-research firm Reis Inc. That is the largest increase since 1999. Effective rents, which take into account landlord concessions like interior construction, fell for neighborhood shopping centers in 65 of the 76 markets Reis follows. The retail woes aren't limited to stores and landlords. With rents falling and vacancies rising, analysts expect a growing number of shopping centers to default on their mortgages, adding to the strain on banks and other lenders. The delinquency rate on securitized mortgages for malls and shopping centers -- just one sliver of the overall lending market -- is expected to double this year to roughly 2%, representing roughly $5 billion, according to credit-rating firm Realpoint LLC. Landlords with the most desirable locations are still able to hold out. The only tenants who have asked Simon Property Group Inc. for concessions are those that are in bankruptcy or about to file, says David Simon, Simon's CEO. "If we have an existing lease with a national retailer, there is no concession being granted. Renewals and new leases are subject to negotiation. Are those negotiations more difficult because of the environment? Naturally, yes." Others landlords say they are ready to let some tenants fail. "It's almost always in our best interest to keep a tenant if the tenant's viable," said Jonathan Gould, CEO of Stonemar Properties LLC, which owns stakes in 30 U.S. shopping centers. "But if the lease is well below market, I'm going to let them go out of business." The retailers in the best position are those that are still expanding. Best Buy Co., Costco Wholesale Corp., Au Bon Pain Inc., Family Dollar Stores Inc. and others are finding cheap lease rates offered on locations previously out of their range. Family Dollar, a chain of 6,600 stores, intends to open 200 stores in its fiscal year ending in August. "We are beginning to notice a little bit of softening in real-estate rates, and our real-estate folks expect that to increase over the next year or so," spokesman Josh Braverman said. —Jennifer Saranow contributed to this article.

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