E-commerce continues to change the landscape of traditional retail  Q3 2018 Houston Retail MR Market Indicators

In today’s ever-changing economy, it is vital for traditional retail, especially those in the “soft goods” category, to recognize that the retail landscape is also constantly changing, particularly in the face of e-commerce. With this changing retail landscape, comes changes in the types of retail tenants and uses in shopping centers as a whole. However, often this requires cooperation between the landlord and its anchor or major tenant. And as a result, it has become important that traditional retail change its attitude towards “prohibited use” language.

A softening of prohibited uses or restrictions is often necessary to improve the health of a center, and contrary to traditional belief may ultimately be for the benefit of the retailer providing the relief. As we all know, the internet and e-commerce have changed how we shop and why we go to retail centers. Today, almost everything in your closet, pantry, refrigerator and most of your home electronics can be purchased online, and generally is. The shift in how we buy our goods and what we leave our homes to buy has led to the closure of thousands of under-performing stores, bankruptcies to electronics, apparel, shoe and other soft good retailers (most recently Sears/Kmart). Additionally, for those that have survived, there is now a movement towards shrinking of footprints, or “rightsizing,” and the consolidation/elimination of excess “brick and mortar.” The result has been large voids, increasing vacancy and loss of anchor tenants in many shopping centers.

Many of these vacancies are being absorbed by what is generally regarded as non-conforming service users (i.e., medical, entertainment, health and wellness, restaurants and schools, to name a few users). The problem for the landlord has often been that although these users represent the fastest growing categories in retail, many of these non-conforming users are prohibited by anchor and junior anchor tenants. Ultimately some uses can’t get into centers due to restrictions, and in other cases, it will require the consent of one or more tenant. Unfortunately, many retailers (some of them very significant major tenants in lots of centers) are looking at the “prohibitive use” language as a means of capitalizing on antiquated provisions that most have little to no adverse effect on their business and are profiting by providing their consent. Many retailers are layering non-essential or inconsequential prohibitive use language in their leases, not in an effort to keep out competitors or undesirable uses, but in an effort really to control the character of the shopping center. As landlords chase the “best” tenants, they often had to or continue to acquiesce to the demands of majors, and this subsequently forces the landlord to negotiate a waiver or consent at a later date. The waiver process can be as simple as a conversation followed up by an email acknowledgment- “sure we like the use and think its good for business”, or more often than not, a negotiation for compensation to grant the waiver (regardless of whether the new user will enhance the center as a whole and ultimately benefit the party providing the waiver). The list of demands might be as simple as a nominal one-time payment or granting additional term, or more likely a more significant payment or tenant allowance, or rent reduction for the balance of the term (both in base rent and NNN’s). In other instances, the tenant may seek to shift responsibilities or obligations under the lease from the tenant to the landlord- either way, the cost of obtaining a waiver or consent has been raised. Sometimes the demands are so egregious the landlord can’t move forward, and the landlord loses out, but often these demands are negotiated, and the non-conforming use is permitted to lease space in the center. 

 
Q3 2018 Highlights

Houston Q3 2018 Retail Infographic35

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