Monday, May 2, 2011

More on Ghost Malls - Co-Tenancy

If you think residential real estate is all about location, location and location try doing some retail work!  There tenants or buyers don't just want the right neighborhood, the want the right, side of the street, a full mall and the right mix of tenants.  Oh, and tax incentives don't hurt either, especially for the box tenants.

This story gets into traditional and strip mall vacancy rates (which will vary wildly) and does a good enough job, but I wish it had taken the analysis a step further. So I will.

National tenants and retail tenants with a lot of negotiating power will often negotiate co-tenancy clauses in their leases, giving them the right to reduce rent or even terminate the lease if certain events occur.  Usually they involve one of two events, and sometimes both.  The first is if the leased area of a center goes below a certain threshold, then the tenant has the right to walk.  The other typical co-tenancy clause involves a major store; e.g., if two of the four anchors close the smaller (also known often as "in line") national tenant also has the right to shut down.

If you are not a CRE pro and ever wondered why your local mall, within a short period of time, went from being full to half vacant or even dead, this is sometimes the answer.  Certain leasing events with other tenants occurred that triggered the co-tenancy clause in many leases and folks starting blowing out.  This is by no means the only reason. Sometimes a new, better center opens.  Other times, leases just expire (for instance, I have seen malls go half empty around the 10th anniversary of an opening).  But add another possible answer for the reason to your arsenal, one that the average guy will not think of or know about. (But then the average reader of this blog probably knows that, right?) And  landlords will often, when they can, negotiate incentives to get tenants to stay, especially if they know a co-tenancy may be at risk.  (If you don't think that happened with Border's, guess again.)

All that said, remember the magic word of location. If your building is where the shopper are or want to be, you are in way better shape than...well, the others.