Landlords and tenants have had a trying year, but it is time for the two sides to adopt a joint view of success
Sep 8, 2009 10:41 AM, By Elaine Misonzhnik
For JMW Development LLC, the renegotiation request came rather unexpectedly. The Minneapolis-based real estate development firm had been working with discount retailer Target for several years on its Commerce Hill project in Woodbury, Minn. The chain was scheduled to open a 185,000-square-foot Super Target as the anchor for the 289,564-square-foot mixed-use center some time in 2010.
But at the beginning of July, out of the blue, Target informed JMW that it would not be able to inhabit the project unless it could rework the terms of its lease.
Some commentators have speculated the move could have been due to Target’s lackluster performance in recent months. In June, Target’s net sales fell 2.6 percent, to approximately $5.7 billion, compared to a year ago. Its same-store sales fell 6.2 percent, a bigger decline than the 5.1 percent reported for U.S. chain stores as a whole. Nevertheless, Target expects to open at least five stores in 2010 and might add 25 to that list going forward.
JMW declined to comment for Retail Traffic, but the company appeared taken aback by the turn of events, according to a report in the St. Paul Business Journal that said as recently as June the process appeared to be moving forward smoothly. Meanwhile, a spokesperson for Target said the retailer “remains interested in a location in Woodbury and we’ll continue to work with the developer to find a solution.”
The situation is indicative of a problem currently plaguing the retail real estate industry. Both landlords and tenants are suffering in their own ways. Landlords are wrestling with higher vacancies, falling property valuations and debt loads that are impossible to pay off or refinance in the current credit climate. Retailers have seen sales volumes tank while credit remains limited and their peers continue to disappear. They are holding off on openings, closing stores, entering bankruptcy protection or, in worst case scenarios, liquidating entirely.
Navigating this difficult economic landscape has put retailers and landlords at loggerheads. The retailers are seeking rent concessions whether they need them or not. The landlords, desperate to maintain as much cash flow as possible and facing onerous loan covenants, are loath to grant them. Each side is suspicious of the other. And examples like the one taking place in Woodbury—where a retailer requests changes on a deal before the store has even opened—are not helping matters. Ultimately, however, an adversarial relationship hurts both sides. Retailers and landlords need each other to survive. That means they have to find a way to handle concession requests more amicably, while at the same time working together in areas like marketing and advertising to benefit both the center and the tenant. With everyone short on cash, this will not be easy. But as more and more tenants face the risk of bankruptcy and as an increasing number of malls and shopping centers face foreclosure, cooperation will be the main route to survival.
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