“Reciprocal easement agreements” are hamstringing mall landlords, preventing them from making strategic modifications to make their shopping centers more attractive to consumers, The Wall Street Journal reports.
The contract clauses allow anchor tenants like department stores to block landlords’ attempts to modify their properties in ways anchors deem detrimental to their businesses, which could include how space is carved up or redeveloped.
Meanwhile, another Wall Street Journal report citing a recent note from investment advisory firm Alder Hill Management says that lower-quality malls face a deluge of defaults. Alder Hill recently placed a short position on several commercial mortgage-backed securities.
While the Great Recession halted much of the unsustainable expansion of retail space that has steadily diluted retailers’ sales per square foot averages, the U.S. remains overstored. In a recent report, CoStar Group contended that nearly 1 billion square feet of U.S. store space must go by closing stores, converting retail space for other uses or reducing rents.
Green Street Advisors last year suggested department stores must close hundreds of additional locations in order to recapture previous levels of productivity — action that could decimate malls. That would bring the number of malls closer to what they should be according to J. Rogers Kniffen Worldwide Enterprises founder-CEO Jan Kniffen, who said last year that while there are some 1,100 enclosed malls in the U.S., the number should be closer to 700.
"Simply put, it all comes down to productivity," Suzanne Mulvee, director of U.S. research, retail for CoStar Portfolio Strategy, said in the report. "Retailers on average are generating fewer sales per square foot than they did during the decade leading up to the recession."
Now reciprocal easement agreements appear to be fostering a real estate-specific “tragedy of the commons,” an economic conundrum where individuals move to reap the most benefit from a resource (in this case, shopping malls) to the detriment of the greater group.
While anchors — often department stores that are reeling from difficulties addressing changing consumer tastes and shopping behaviors — may see leverage in their contracts with their landlords, they may be hurting themselves in the long run if they don’t go along with much-needed modifications.
Meanwhile, mall property values are shrinking in many areas of the U.S., and landlords are increasingly throwing in the towel when they get underwater. Last year, from January to November, 314 loans secured by retail property — totaling about $3.5 billion — were liquidated, a rise of 11% from the same period in 2015, according to data from Morningstar Credit Ratings cited by the Journal. The loans were some $3.5 billion in total and liquidations meant a loss of $1.68 billion. Retail property loan delinquencies increased by 0.6 of a percent point to 5.76%, according to data from real estate research firm Trepp LLC. “Special servers” that handle troubled commercial mortgage securities took on $3.1 billion worth of retail property-backed loans last year, up from $2.9 billion in 2015, Trepp said.
But while the over-expansion of stores and the rise of e-commerce are frequently blamed for creating the predicament that many retailers find themselves in, shopping mall landlords and retailers should be wary of using old methods of calculating productivity in the omnichannel age, according to Hongwei Liu, co-founder and CEO of wayfinding technology firm Mappedin.
“Traffic as we all know is only going in one direction, but revenue is going up,” Liu told Retail Dive, noting the value of traditional store and mall metrics is “breaking down because of accounting, not because of Amazon. When the customer wants red jeans instead of blue, and comes in and tries them on the store and orders the red — you know that your store created that value. That’s where productivity is."
Retailers require a synthesis of data that is ultimately more useful in gauging which stores should close and which stay open, Liu says. But the data is often misconstrued, experts say. Individual customers are important in the old-fashioned sense that a retailer’s job is to “give the customer what she wants,” but retailers also should be taking careful note of customers’ buying habits and desires to discover the keys to optimal supply chain decisions.
That insight could presumably also help landlords win arguments with tenants that are blocking needed improvements in the belief such modifications would hurt their businesses.