Skip navigation
kohls Justin Sullivan/Getty Images

As Anchor Stores Close, Co-tenancy Clauses Can Still Cause More Problems

As retailers that have traditionally served as mall anchors—be they department store chains or big-box players—announced major store closings this year, co-tenancy clauses have become an area of risk in a shaky market.

Co-tenancy clauses first became a concern for retail property owners 10 years ago, as the Great Recession put pressure on many tenants and store closings and bankruptcies spiked, according to Greg Maloney, president and CEO of Americas retail with real estate services firm JLL. “We have started removing these in the past five-10 years from anchor tenants’ leases, as anchors are not what they used to be in regards to impact on in-line tenants,” he notes.

Macy’s, Sports Authority, Sears and Kohl’s are among the department stores to announce store closings recently. As these stores shutter, what does it mean for both neighboring retailers and the vacated spaces?

“The co-tenancy clause situation is going to be different in every mall. It is very important and very widespread. Developers are going to want to do different things. My instinct is owners will do whatever it takes to keep those smaller retailers happy,” says Howard Davidowitz, chairman of Davidowitz & Associates, Inc., a New York City-based retail consulting and investment banking firm.

“In my view, mall developers are not facing the magnitude of the problem. Malls are in a dangerous situation. The growth vehicle for malls is not department stores. Specialty chains are going to have leverage here,” Davidowitz adds.

Gap is one of the retailers reported to be considering using its leverage to this very purpose. Co-tenancy clauses can allow in-line tenants to switch to either percentage rent or reduced rent when an anchor like Macy’s goes dark, says Don MacLellan, senior managing partner at Irvine, Calif.-based brokerage firm Faris Lee Investments.

“Inline specialty stores are the real rent payers in a mall and many are doing terribly,” Davidowitz notes. He points to PacSun’s bankruptcy issues as an example, calling the recent REIT consortium save of Aeropostale “an unprecedented defense move.”

How deep is the impending Domino effect? The practice of giving anchor tenants sweetheart deals to entice them to take mall space, while inline retailers paid much higher rents, was widespread prior to the Recession. On the other hand, getting the anchor spaces back might allow landlords to charge market-rate rents for those stores.

“For the most part, unless you are in a failing mall, the owners will want that space back. Rents for that anchor space were historically low to entice [anchors] to stay, so being able to re-lease that space at a higher rent could be very advantageous for the owner,” Maloney says.

TAGS: News
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish