Landlords face growing concessions to survive the slump

Declining foot traffic and a plague of tenant closures are challenging mall owners to rethink or even relent on their leasing policies.

The Bureau of Statistics reported last month that major-mall sales dropped for the first time in a decade, according to Bloomberg, signaling a worrying decline in foot traffic.

This has put pressure on retailers who now suffer from weaker patronage while burdened with still-sky high rents. Tenants of all shapes and sizes, from high-profile department store chains like Myers Holdings to franchise QSR’s, are even planning to close down their mall stores, citing unsustainable rent costs.

Australia mall rents count among the most expensive in the world due in part to a lack of supply, with Sydney and Melbourne in the top 10 most expensive places in the world to rent shops, said Bloomberg. It further added that Australia-wide rents haven’t dropped since 1997 based on records from property broker CBRE Group Inc.

Easing of Rents for New Tenants
But the recent rash of tenant closures may be convincing property firms to finally ease up on rent – or at least enough to entice new tenants to replace exiting ones.

“I read that some of the shopping centre operators like Westfield Group, Stockland and GPT Group are lowering rents for new stores and existing stores are calling for cuts,” said Sam Nash, Managing Director, Nashi Corporation, which operates a chain of healthy sandwich outlets.

Nash was referring to last month’s confirmation that three of Australia’s biggest operators are lowering rents for new stores. But for renewing tenants, including Nash which has a number stores located in the Central Business District, mall owners resist the urge to slash rents. “I have not witnessed this goodwill gesture in the CBD as yet,” he said.

Greater Leverage for Existing Tenants
Even though existing tenants’ call for rent cuts remain unheeded, retailers seem to be wielding more bargaining power versus the landlords.

“We find our negotiations have greater leverage when we approach the landlord early as opposed to waiting for them to approach us,” advised Graham Streeter, General Manager Business Development, SumoSalad.

Streeter said that QSR’s need to dig deep into the numbers, taking into consideration not only how the store is performing but also how well the whole shopping centre is faring, in order to get the better end of the deal.

“It is important to understand the benchmarks that apply to the industry including occupancy percentages and rates per square meter. Understanding the performance of the shopping centre including MAT, customers through the centre, sales performance of the majors and specialty sales per square meter also assists in positioning the commercial proposition,” he said.

QSR’s must also factor in the refurbishment costs, which can be quite hefty, when negotiating lease renewals.

“One area of concern is the escalating costs associated with refurbishment of premises upon the renewal of a lease. Whilst tenants must understand their occupancy cost obligations there is also a significant capital requirement to refurbish the premises in an environment where obtaining funding from the banks is challenging,” he added.

Mutually Beneficial Relationship
At the end of the day, retailers and landlords are lumped in the same boat, and both should cooperate rather than compete to survive the current slump, according to Ian Carrigan, Senior Leasing Executive at Stockwells.

Retailers need to look for ways to innovate while landlords need to get off their high horse and start to hear out the bargaining points across the table.

“Food and images need to continually reinvent itself. Retailers who don't evolve will die off,” said Carrigan.

“To me, landlords and tenants should always work and communicate together. That’s what it used to be like. ‘Happy Landlord, Happy Tenant.’ The trend seems to have changed over the past couple of years,” he said.

“It's kind of an attitude of 'if you don’t like the offer, we can replace you by the end of the week'. It's not the way to promote a mutually beneficial relationship. That’s when communication breaks down and neither party is ever happy,” he added.