July 26, 2011

Thinking Outside the Traditional “Retail Box”

Lori Kilberg, partner

The retail industry is still in the doldrums and many shopping center landlords have  had enough. With vacancy rates skyrocketing, landlords are getting creative by leasing to non-traditional tenants (NTT).  Jeffrey Wild with Benesch Friedlander Coplan & Aronoff and I presented this concept at the U.S. Shopping Center Law Conference in Hollywood, Fla. last November. Eight months later, 25 percent of my work deals with nontraditional leasing and I see this trend continuing. When people ask why this is so prevalent, my answer is, “It just makes sense.”

Shopping Center So what is a NTT? A non-retail business – almost any business you can think of – that leases retail space. Some of the most common non-traditional tenants are in the healthcare industry. As retail struggles, the healthcare industry is growing. We are seeing everything from outpatient clinics to physical therapy centers to rehab facilities in shopping centers.  Also, education is taking shopping centers by storm, with colleges, training centers and dance/music schools leasing space. Plus,  government agencies, temporary pop-up stores, thrift stores and entertainment destinations are in on the trend.

And, why not? In most cases, these opportunities create win-win situations for landlords and NTT tenants.

Why this is good from the landlord’s perspective:

1)   A number of NTTs have deep pockets and can pay high rent.

2)   NTTs can bring more foot traffic into the shopping center which is a win for landlords and existing tenants.

3)   Many NTTs won’t need an expensive build-out, which fills vacant space more cost-effectively than a traditional tenant, or are willing to invest a substantial amount of money to improve the premises without a substantial landlord contribution, given a long term lease.

4)   Large anchor stores can be divided into NTT space to decrease vacancy .

5)   Even in distressed properties, landlords can fill vacancies with value-oriented retailers like thrift stores that need favorable lease terms. This may provide long-term stability to a property without reducing the value of the tenant mix.

Why this is good from the NTT’s perspective:

1)   Shopping centers are cheaper and more demographically inviting than medical or business campuses. They can generate business from the customers of the shopping center.

2)   In a shopping center, NTTs often get good visible signage from the road that they would not receive in a medical office building or campus.

3)   The prime locations of shopping centers in neighborhoods and dense population centers are attractive.

I would love to hear your thoughts! Please feel free to comment below and check back next week for a discussion on the legal issues surrounding NTT deals.


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