Tenants and landlords both faced a tough reality in 2009: they’d be far better off replacing their traditionally adversarial relationship with a partnership to assure their mutual health, if not their survival. The name of the game now is filling space. Rather than sacrifice more of their valued tenants, landlords are realizing they have to get creative and offer various incentives, enticements and rent concessions that they wouldn’t have considered at the height of the market just a few years ago.

The deal-making options remain on the table in 2010. Here’s an overview of some of those strategies:

Because shopping center landlords typically have mortgages to pay based on a tenant rent flow, they’re not always in a position to grant steep rent reductions or out-and-out free rent. But what they can offer is free rent, in effect, that’s prorated over several years. This is a win-win for both parties because the retailer is getting the rent adjustment it needs and the landlord isn’t getting beat up from a financing or valuation standpoint.

We also see deals where gradual step-up in rent occurs. For example, if a landlord wants a long-term “market” rent of $20,000 per month, but the tenant can’t reconcile those numbers under present conditions, the landlord might agree to accept something like $12,000 the first year, $14,000 the next and so on until the tenant is paying the full amount, with standard increases set to kick in during ensuing years. This helps the landlords recoup the shortfall and gives tenants more leeway to build their businesses in tough times and eventually gives landlords the market rent they need.

Every deal is critical these days, particularly as shrinking retail occupancies cause “co-tenancy clauses” to kick in for some retailers. This can start a devastating domino effect where one vacancy leads to another. Once a center gets the reputation of being half-empty, it is a disappointment for the landlord, for the tenant and for the consumer.

It is much better to nip the problem in the bud by offering the would-be departing tenant an alternative of half their average rent for six months to a year, which allows them more latitude to re-evaluate their situation. Similarly, many tenants have a “go-dark clause” that allows them to close without reason before the end of their term, even though they’re still obligated to pay rent. In many of these cases, the tenant will agree to keep operating if their rent is reduced. But as with all partnerships, trust is earned—if tenants are seeking rent breaks, they should expect to open their books to show their pain to the landlord.

Landlords can also offer performance-based deals with tenants. For example, a tenant might agree to pay $22 per-square-foot over the first 5 years of a lease if they can generate $300 of sales per square foot, then pay $25 per square foot if they hit $400 per square foot in sales, and so on. Other deals can be structured so retailers pay a percentage-of-sales rent for three years, then permanently lock into the three-year average when they enter the fourth year of their lease.

We’ve seen some tenants agree to pre-pay their rent at a discount, which is a good solution if the landlord is hurting for cash flow. It also assures that the landlord won’t have to chase the tenant for rent at any point – another win-win.

As for aggressive tenant recruitment tactics, landlords can offer tenants the flexibility to cancel their leases during their term with minor termination penalties. Temporary pop-up stores are another good way for landlords to fill spaces and derive immediate income – and for tenants to test-market their products with minimal risks. Such leases can be structured for longer term options.

Robin Abrams is an X Team International partner and executive vice president of New York-based The Lansco Corporation.

Jerry Welkis is an X Team International partner and president of New York-based Welco Realty, Inc.

The Meadtown Shopping Center in Kinnelon has seen enough turnover to reflect the recession's impact on the retail industry.

STAFF PHOTOS BY AMY NEWMAN
At the Meadtown Shopping Center in Kinnelon, Petco replaced the Rag Shop. Sylvia Mastropole and her husband, Sal, are opening a hair salon, and John Park is guiding his bagel shop through the downturn. Marty's Shoes is vacant.

The departure of the Rag Shop in 2007 left a 16,100-square-foot vacancy that was followed by the loss of stores from other chains — Marty's Shoes, ice cream vendor Cold Stone Creamery, Ritz Camera's Shop Inc. and the local chain Falls View Grill. A Blimpie's sandwich store also vacated its space adjacent to the mall.

Such vacancies by national and local chains at Meadtown and other strip malls in northern New Jersey are leading to concessions by landlords and opportunities for small businesses to occupy space that has been out of their reach.

Retail vacancy rates for North and Central Jersey were 8.2 percent in August, about three percentage points higher than a year ago, though still below a national average that has been as high as 15 percent, said Chuck Lanyard, president of New Jersey's largest retail brokerage firm The Goldstein Group, quoting from his agency's most recent report.

"With that percent, landlords are taking non-traditional tenants that they normally wouldn't," said Lanyard.

Meadtown's small businesses such as Kinnelon Bagel and Kataw Jewelers, a Hallmark cards and gifts independent franchise, and other chains have survived. With new neighbors moving in, the remaining businesses are cautiously optimistic a turnaround is on the horizon.

"Business is starting to show signs of improvement," said Bob Sterenson, who owns Lynne's Hallmark Shop with his wife, Lynne. "But I don't know if things have improved or just stopped getting worse."

Things took an optimistic turn recently when pet-store chain Petco took over The Rag Shop space and the South Beach Tanning Spa LLC took the Cold Stone Creamery site in late November. Earlier this year, Meadtown got additional traffic from new tenants in the adjoining strip mall that shares the parking lot — the Butler Bowl Plaza. The New York Sports Club and the Wayne Pharmacy and Surgical Supply moved in and a new hair salon/day spa is expected to open in February.

Negotiations are under way to fill most of the 15,000-plus square feet still vacant in Meadtown, said Jerry Welkis, president of Welco Realty Inc. in New Rochelle, N.Y., the mall's broker. "We're finalizing a deal right now for a shoe chain to take over the Marty's Shoes space," he said. "The idea is for them to open for spring of 2010."

A deal is also in the works with a restaurant to take the place of the Falls View Grill, he said, and Welkis hopes to lease all but 5,000 square feet by the late spring in the 77,000-square-foot mall. The shopping center has good visibility, customer traffic and easy access to Route 23, he said.

"This center is like a lot of other centers in New York and New Jersey," said Welkis. "It really got hit with an onslaught of major companies going into bankruptcy. It has nothing to do with the center itself."

New interest in Meadtown and Butler Bowl Plaza came recently after the owners of the 47-year-old bowling alley in the Butler shopping center gutted it in 2007 and replaced it with four storefronts and the sports club.

Sal Mastropole and his wife, Sylvia, a hairstylist, plan to open "b euphoria" a hair salon and day spa, in a 1,900-square-foot space in February as her first salon business. "There's traffic — lots of people walking — it's accessible and off of a major highway," said Sal Mastropole. "It's a no-brainer."

That leaves 2,500 square feet still left to rent for the Butler plaza's owners. "We're optimistic," said Jim Rohrer, president of Butler Bowl Inc., a consortium of 15 stakeholders. "We're getting a lot of phone calls for the space we have. They're looking, but they're also shopping."

The storefronts are small, said Rohrer, so the callers are doctors and physical therapists and convenience and nutrition stores attracted by the sports club.

Goldstein Group's Lanyard said dental practices, day-care businesses, hamburger franchises such as Smashburger and the health club LA Boxing are also opening in strip centers because it's more affordable now.

"There's a real entrepreneurial spirit out there,'' said Lanyard, "a window of opportunity [about 18 months] to get into great locations with landlords who will now entertain talking to [these] tenants."

In the case of Petco, Welkis said the property owner had to pay for and do the renovations — for an amount he wouldn't disclose. Pet stores are one of the few sectors that have prospered in the recession.

"We kept rent where we needed it to be and where we wanted it to be, but it cost the landlord some money to do that," Welkis said. "In other times, we wouldn't have had to." Welkis said in general, rents are as much as 30 percent lower than they were 1 1/2 to two years ago.

The lower lease rates prompted Rich Mayer and his family, who were looking to expand their two South Beach Tanning Spa salons, to choose Meadtown. They also wanted the parking and visibility, and they believed New York Sports Club members would be into tanning.

The landlord put in a drop ceiling, removed partitions, leveled the floor and installed lights in the 1,650-square-foot space.

"It's definitely a tenants' market," said Mayer, "because price per square foot is much cheaper now than when the economy was better," about 30 percent to 50 percent less, he said. Kinnelon Bagel owner John Park said he has yet to see business pick up from the new tenants in Meadtown, although the business has survived the vacancies and the recession. Sales dropped as much as 40 percent from January to early April but picked up over the summer, only to fall after September. October sales were down as much as 15 percent compared with a year ago, said Park.

"It's going to take some time" to recuperate, he said.

Other businesses have seen more evidence of a turnaround. The sports club's entrance in the back of Meadtown by the movie theater has given new attention to the otherwise out-of-the-way Meadtown Barber Shop.

"That has helped," said owner Ray Mininni. "You have to have stores that bring people. We're hoping they do good."

New Rochelle, NY – October 12, 2009 — Welco Realty, Inc., an X Team partner, announced today that it has leased three former Linens & Things locations. 1) A former 60,000 s.f. Linens & Things store was leased to Dick’s Sporting Goods in Paramus Towne Square, Paramus, New Jersey due to open Spring 2010. 2) A portion of the former Linens & Things in New Rochelle, New York (14,000 s.f.) was leased to Party City. 3) A division of T.J.X Companies, Home Goods, leased approximately 25,000 s.f. of the former Linens & Things space in the Nassau Park Pavilion in Princeton, New Jersey. Nassau Park Pavilion is owned and managed by Developers Diversified Realty.

About Welco Realty – Welco Realty, Inc. was formed more than 25 years ago to specialize in retail site selection for retail chains and to represent shopping center developers and landlords as their retail leasing specialists. Welco Realty’s objective is simply to provide high quality professional Real Estate Consulting / Brokerage services catered to our clients’ needs. Welco Realty works closely with its retail clients to help develop their store expansion strategy to include market analysis, site selection, demographics, competition evaluation and lease negotiations to successfully conclude all transactions. Welco works with their developer clients from ground up construction to leasing vacancies in existing centers. Welco has an aggressive marketing approach to finding the right tenant for the right property.

For more information, contact Mr. Jerry Welkis at jwelkis@welcorealty.com.

About X Team – X Team International is a leading retail real estate brokerage alliance serving the world’s premier tenants, landlords, developers, owners and third party service providers. Comprised of industry professionals from small and mid-sized boutique firms who average more than 20 years of experience, X Team International has proven expertise in more than 45 major markets, and partners located in some of the largest cities throughout the U.S., Canada and Europe.

Leveraging the extensive knowledge and years of industry experience shared by X Team International partners, the alliance specializes in tenant representation, developer/landlord representation, distressed property consulting, retailer property dispositions/workouts and retail investments. From in-depth analyses to site selection, leasing and transaction negotiations, no one is more qualified to handle your retail real estate needs and help you achieve your goals than X Team International.

Houston, TX – X Team, an international alliance of retail real estate advisors, said Tuesday that several of its partners have received the 2008 Power Broker Award from CoStar Group.

Each year, CoStar Group acknowledges the top firms and individual dealmakers by market based on their overall transaction volume for the entire year in a variety of categories.

Two X Team partner firms were recognized as Top Leasing Firms/Lease Transactions: Jacksonville, Fla.-based Strategic Sites Clifford Commercial and New York City -based Welco Realty.

In addition, seven individuals were recognized as Top Retail Leasing Brokers/Individual Leasing Transactions: John Cumbelich and Ben Lazzareschi of San Francisco-based John Cumbelich & Associates; Raymond Kenney of Boston-based Strategic Retail Advisors; Jerry Welkis of New York City-based Welco Realty; Steve Miller of Miami-based The Rotella Group; and Charlotte Walley and John Zikos of Dallas-based Venture Commercial Real Estate.

Elaine Misonzhnik – At a time when retail landlords are struggling with record vacancies, a novel sales strategy employed by some tenants is helping them fill the gaps and earn some additional rental income. Pop-up stores, which allow a retailer to sign a temporary lease lasting anywhere from two months to six months, have traditionally been scoffed at by mall and shopping center owners who could take their pick of permanent tenants. But in today’s environment, with retailers wary of new store openings, pop-ups are becoming a hot new trend and landlords are finding it suits them just fine.

“I am seeing more and more retailers testing out a temporary location, rather than locking into a long-term [lease],” says Jerry Welkis, partner with Welco Realty, Inc., a New Rochelle, N.Y.-based brokerage firm and member of the national X Team retail services network. “It’s a win/win kind of thing, because if a landlord has vacant space, he can get good tenants in and then get them out when he needs them out, and get some income as well.”

Earlier this year, casual apparel seller Gap Inc. secured temporary locations in Los Angeles and New York City to market its new product line, 1969 Premium Jeans. The stores will remain open through September. Luxury seller Gucci is planning to launch a traveling sneaker store in October, which will debut in New York City, move on to Miami and eventually appear in London, Berlin, Paris, Hong Kong and Tokyo, among other cities.

Meanwhile, this holiday shopping season, toy seller Toys “R” Us might open up to 70 pop-up stores on a national basis in markets previously occupied by defunct rival KB Toys, according to Welkis, whose firm worked with Toys “R” Us on two such locations in New Jersey. Footwear retailer Nine West has also been looking to do more pop-ups under its Bannister Shoes name. The chain uses the temporary locations to sell leftover merchandise. Target has used the strategy as well. For example, it opened up several temporary bodegas in New York City last year as a way of establishing a presence in Manhattan—where it currently operates stores.

Pop-up stores allow retailers to increase revenue during critical sales periods, including the back-to-school, Halloween and holiday shopping seasons, without taking on the risk of a permanent location, says Matthew Bordwin, managing director and national co-head of the real estate services team in the Melville, N.Y. office of KPMG Corporate Finance LLC, a middle-market investment bank. Down the line, if the temporary stores prove successful, they might lay the groundwork for permanent stores. Meanwhile, smaller, regional retailers might see temporary stores as a way to gain access to high-profile retail centers whose landlords would not otherwise view them as viable tenants.

There is a certain level of convenience as well, as most temporary locations don’t require any build-out work, and rental rates tend to be relatively affordable. There’s usually a fixed rental rate that encompasses common area charges and taxes and tends to be about half of what is paid by permanent tenants at the same center, plus anywhere from 4 percent to 7 percent in a percentage of sales rental fee, according to Welkis. But landlords, fearful about how an empty space in the middle of their property is going to affect shopper traffic, are more than happy with the arrangement right now.

“The landlords are open to anything, they are open to any retailer that has a concept and some money because they have empty space and empty space doesn’t pay the rent,” notes Bordwin.

In fact, as some national retailers have begun to take larger chunks of space for their temporary quarters—sneaker seller Reebok, for example, is looking for locations totaling at least 20,000 square feet—pop-ups are even helping fill up some vacancies in big boxes, says Welkis. The big-box category has been the most heavily hit by bankruptcies and liquidations this year, with the national vacancy rate hitting 7.3 percent in the first quarter, according to research from Marcus & Millichap Real Estate Services and the CoStar Group. That’s an increase of 280 basis points from 4.5 percent in the first quarter of 2008. But while pop-up shops will likely become a common sight as the retail industry heads into the holiday shopping season this fall, don’t look for the trend to hold up once real estate fundamentals return to more normal levels, says Jeff Green, president of Jeff Green Partners, a Mill Valley, Calif.-based consulting firm. For landlords, pop-ups represent a desperate measure and they will start saying no to them as soon as some permanent tenants appear on the horizon.

“This is a really unique time,” Green says. “I am not sure we’ve had such a long, deep recession [before] and one in which the consumer really put on the brakes in terms of shopping. The developers are not totally thrilled with this idea, but they realize they have to do something to increase their income. It’s not something they will want to do long-term.”

New Rochelle, NY – Welco Realty, Inc., was pleased to represent Hartz Mountain Industries on the opening of the T.J.Maxx store in Secaucus, New Jersey, which was part of the redevelopment of the Mill Creek Mall. The store is 28,414 s.f. T.J.Maxx had a tremendous opening. Babies R Us superstore and Sports Authority will be following with their respective opening shortly.

Welco Realty, Inc., also has represented Hartz Mountain Industries on the leasing of the present Loew’s Theaters in Secaucus, New Jersey (43,000 sf) to LA Fitness Center. LA Fitness Center will now join other major retailers in the Harmon Meadow retail and office complex, such as Walmart, Sams, Marshall’s, Home Goods, Sports Authority, Babies R Us, Toys R Us, T.J.Maxx, A.C.Moore, PetsMart and a new 14 plex stadium seating theater will be opening in late 2009 early 2010.

For more information, contact Mr. Jerry Welkis at jwelkis@welcorealty.com.