Some Retail Landlords Take an Inteventionist Approach and Incubate New Tenants
Apr 27, 2010 2:05 PM, By Elaine Misonzhnik
For about a year, Levin Management Corp., a Plainfield, N.J.-based real estate services firm which manages a 12.3-million-square-foot retail portfolio, has been getting an increasing number of calls from people looking to start retail businesses.
Today, approximately 20 percent of all calls the company’s leasing department takes are from potential tenants who have either no stores or only one or two locations, says Matthew Harding, company president and COO. Some of the proposals are admittedly laughable, with the “prospective tenants” having no real ideas and telling Levin they will sell whatever it is the firm wants them to sell. They see an empty space in a mall and call to ask “What would you like us to put in the there?” Harding notes.
Others might have a valid idea for a new concept, but no previous experience in retail and little to no investment capital. These kinds of entrepreneurs can succeed if they find an experienced partner or opt to run a franchise, but are not likely to survive in the retail business on their own, experts say. But among all the non-starters and penniless dreamers, it’s still possible to find a concept or two that can become a valuable addition to a property. The trick is recognizing who has what it takes.
“Incubating,” or helping launch unknown tenants through short-term leases, has become a popular tactic in a market that’s been ravaged by store closings and bankruptcies. At the end of first quarter, vacancies at neighborhood and community shopping centers reached a 19-year high at 10.8 percent, according to Reis Inc., a New York City-based research firm. Vacancies at regional malls were at 8.9 percent—the highest level in the 10 years Reis has tracked the sector. Most researchers forecast that vacancies will continue to rise through 2010 and will decrease at a very slow pace in 2011.
Most national tenants are not growing. In fact, many are still in the process of right-sizing portfolios. For example, Gap Inc., a staple tenant in regional malls, plans to open only 10 of its namesake stores this year, 15 Old Navy stores and five Banana Republic stores. But after its planned store closings are taken into account, it will actually end up with fewer stores than in 2009. To make up for the lack of leasing momentum from the nationals, landlords have had to take a more favorable stance toward little known independent retailers.
That’s why last fall, Levin Management launched business incubator programs at two of its properties, the 163,000-square-foot Hickory Plaza in Hickory, N.C. and the 227,000-square-foot Liberty Center in Erie, Pa. The programs offered flexible, short-term leases at entry-level rents to those looking to launch new retail operations. Levin held open houses for potential tenants at the properties and provided information about how to set up a business.
“In Erie, we have a lot of smaller shop space and a lot of competition from other landlords, so we are trying to make ourselves a little bit more attractive,” Harding says. “There are [fewer] stores now that take satellite space because of the bankruptcies and limited expansion, so we have to go out and find different users for that space.”
Madison Marquette, a Washington, D.C.-based retail developer with a 20-million-square-foot portfolio, has also launched an incubator program that incorporates a contest for aspiring start-ups called Retail*Star. First announced last spring, the contest offered residents in close vicinity of Madison Marquette’s Bayfair Center in San Leandro, Calif., the chance to showcase their retail idea to a panel of industry experts. The winner, a tea lounge/education seminar service called TeachBar, ended up with a 1,300-square-foot space at Bayfair, $250,000 in free rent, $25,000 in additional investment capital and a build-out allowance. Madison Marquette has also done some business with the runners-up, signing four permanent leases at its other properties.
The contest turned out to be so successful, this year Madison Marquette is launching Retail*Star again. By late March, the firm had already received more applications to enter the contest this year than last. In the spring of 2009, 66 people sought to become contestants.
“The reason we created this program from scratch was we were in a difficult leasing and economic environment, so we wanted to find new compelling uses,” says Eric Hohmann, managing director of property investments with Madison Marquette. “And we wanted to communicate to the industry that we were capable of creative management/leasing techniques. The advantage is that all a Retail*Star participant has is a good idea. We don’t ask any other questions.”
The No Body Denied fitness club at Levin Managements Echo Plaza has thrive since coming to the center last year.
The challenge for the Retail Star panel of judges, as well as for any other property owner or manager dealing with an untested tenant, is recognizing entrepreneurs who can create successful businesses from scratch. Part of the decision-making process undoubtedly comes down to intuition, says Whitney Livingston, regional director of marketing with Madison Marquette who helped organize the contest. But there are also some guidelines that experienced leasing professionals use to help them identify long-term potential of new lessees.
For a concept to be successful it has to be unique and fill an existing need within a mall or shopping center, experts note. The person launching the business needs to have previous experience in retail operations—such as running their own stores or working for another retail chain. They have to be willing to use their personal savings for living expenses while the business gets established, which can take more than a year. A tenant must be willing to spend long hours minding the store. Perhaps most importantly, they need to have true passion for their concept and be willing to tweak the operating model to serve customer needs.
For example, Ben Wanzo, last year’s Retail*Star winner, is an energetic former high school teacher and McKinsey consultant who had a clearly articulated, unique idea for a business that fit well with Bayfair’s demographic, according to Livingston. His concept, a tea lounge that offers educational seminars ranging from SAT preparation to foreign language classes, is in tune with the current economic climate, when many people are looking to change professions.
Wanzo says he would not be able to execute his concept successfully without help from Madison Marquette, which included input from a business consultant and high-end store and logo designers. “Just the capital that they provided was huge because it allowed me to essentially get into a store with minimal investment on my own,” he says. Prior to seeing the contest advertised in the Oakland Tribune, Wanzo thought about offering classes online.
Part of the reason he won, according to Livingston, is his obvious business savvy and ability to adapt. “We didn’t have 100 percent confidence the idea would work, but we believed in Ben’s ability to have the foresight to adjust the model if it wasn’t going the way it was planned,” she notes. “If tea wasn’t selling, we knew Ben had the business acumen to adjust the menu quickly before the business went bad. It was as much about the entrepreneur himself, as it was about the business concept.”
Hot or not?
One of the difficulties in growing a new retail business is that the U.S. is already over-stored, according to most experts. Pick any category—furniture, apparel, electronics—and there are likely to be at least three or four market leaders, followed by a dozen or so smaller national players. That means anyone thinking about a new concept has to present whatever is being sold in a new, fresh way.
For example, last fall Levin Management leased a 9,038-square-foot location at St. George Crossing, a 317,417-square-foot shopping center in Woodbridge, N.J., to the Shannon Rose, an Irish pub. The store at St. Georges Crossing was only Shannon Rose’s second location. But even in a metro area that doesn’t suffer from a shortage of pubs…(Continue reading on next page.)
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