Nation & World

Mall tenants had an out when giants like Macy's left. Now landlords bar the door

Bloomberg

Shoppers walk though Town Center at Aurora in Aurora, Colorado.
Bloomberg Shoppers walk though Town Center at Aurora in Aurora, Colorado.

The only thing more dangerous for America’s malls than a string of apparel-chain bankruptcies is when the trouble hits department stores.

Retailers like J.C. Penney Co. and Macy’s Inc. are considered “anchors” that keep malls humming and foot traffic flowing. They’re so important to the ecosystem that smaller tenants may refuse to set up shop without a promise that the anchors will stick around: Many leases include so-called cotenancy clauses that let them cut and run or pay less if those key tenants depart.

Now, many landlords are pushing to eliminate or narrow the escape clauses in the wake of mass department-store closings. That means less flexibility for the remaining tenants.

“Most retailers based in a mall do live or die based on an anchor,” said Andy Graiser, co-president of A & G Realty Partners, a commercial real estate adviser. “Certain retailers are going to have a risk if certain anchors go away.”

The past couple of years have brought hundreds of department-store closings. This is the result of liquidations (Gordmans and Bon-Ton Stores Inc.), restructuring by struggling chains (Sears Holdings Corp. and J.C. Penney) and pullback by relatively healthy operators seeking to downsize their store presence (Macy’s, which is closing underperforming stores).

While retailers are still flocking to the high-income “A” malls that make up about a third of enclosed centers, lower-tier properties are often struggling to replace lost merchants, sometimes turning to non-traditional tenants such as urgent-care centers.

Landlords are now routinely pushing to chisel away cotenancy provisions when leases come up for renewal, said Ivan Friedman, head of RCS Real Estate Advisors, a New York consulting firm. That wasn’t the case even a couple of years ago.

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That will have consequences, such as leading to fewer lease renewals, said Kent Percy, a managing director at consulting firm AlixPartners.

“They could lose the whole inside of the mall,” he said.

Many of those interior tenants have already suffered mightily, leading to bankruptcies like Gymboree Holding Corp. and Rue21 Inc., which reorganized with fewer stores. Other merchants like Coldwater Creek Inc. didn’t survive.

Ron Marshall, chief executive officer of Claire’s Stores Inc., specifically cited cotenancy clauses as an issue during a June 2017 conference call. The chain filed for bankruptcy last March.

“We do have a limited number of cotenancy provisions, but not to the level we would like,” he said, in response to a question on whether the chain could use the provisions to close stores.

Tenants do have other options. They are negotiating for shorter leases and reduced rents. As a last resort, they can file for bankruptcy, allowing them to exit from leases without penalty.

They may also sign contracts stipulating an exit only if certain anchors leave, Graiser said. “The retailer may say, yeah, I’m OK if Bon-Ton leaves, I’m OK if Sears left, but I’m not OK if Macy’s, Dillard’s, Neiman Marcus or Nordstrom left,” he said.

The definition of what constitutes a key tenant has changed, too. In some cases, it may be a dominant retailer, such as a big-box store, or a high-performing specialty chain.

Even so, landlords are going to remain under pressure, RCS’s Friedman said.

“Everybody is closing stores, everybody is getting lower rents when they do their renewals,” he said. And with the U.S. retail excess estimated at 25 percent, even after earlier shakeouts, “it’s going to continue.”

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Even the departure of a weaker anchor can have a significant impact on its neighbors. Foot traffic in Buddy Kurzweil’s wing of Paramus Park mall, in Paramus, New Jersey, has declined by at least half since Sears closed in February, estimates Kurzweil, the owner of Buddy’s Sports Corner. His shop occupies the spot just to the right of the sealed-off Sears entrance, now fronted by a noisy children’s play area.

“They come down and all they see is empty stores and a lot of little kids screaming and yelling — that’s not exactly conducive to business,” Kurzweil said from behind the counter of the store he’s occupied for a decade. His eight-year lease expired last year, and he’s operating on an extension now. He says he feels uncertain after 45 years in the collectibles business that at one point included six locations.

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