Beyond Pop-Up: Use Creative Leasing that Improves Long-Term Returns

By Peter D. Morris, SCLS, SCSM, SCMD

Conduct an Internet search for “creative leasing ideas” for retail properties, and you'll see a lot of references to leasing to nontraditional uses, such as libraries and community art galleries, or exploiting pop-up store opportunities. Used correctly, these are valid options that have filled space and increased traffic for shopping center owners. But when you start to consider creative leasing, you should first look to creative ways to attract long-term retailers to the shopping center and keep them.

Here's why: Although stubborn vacancies during a downturn certainly affect cash flow and the desirability of a property to other potential tenants, a plethora of nontraditional uses and a revolving door of pop-up stores may also have the same negative effect. And nontraditional uses and pop-ups could have a lasting negative effect on consumers' perception of the property that may take years to correct, even after the economy has rebounded—ultimately affecting the property's value.

Here are a few creative leasing strategies to consider that will produce positive results both in the short term and the long term.

Carefully Choose Tenant Incentives

Incentives are tricky if not done correctly. Simply lowering the asking rental rate creates its own problem because the lower rate then becomes the “market rent” and is no longer a unique incentive. An incentive should prompt prospective tenants to rent space from you, not detract from the price.

Other common incentives are a period of free rent, reduced rent, or a building allowance. They too have become so common that they're now considered part of the market rent formula. In fact, it's common for commercial real estate agents to quote market rents as “$X per square foot, per annum (psfpa), plus $Y in allowance and Z months of free (or reduced) rent.” Any good leasing plan may incorporate these—and the retail industry has come to expect these types of incentives.

The problem with these incentives is that, alone, they don't uniquely position the property to attract attention. In times where there is more vacancy than tenants, other incentives are needed that are unique to the property or owner.

Just like the types of incentives offered to consumers by retailers, the incentive must uphold the price. For example, a furniture store may offer a free flat-screen TV with the purchase of a living room set. But haggle on the price, or terms, of the living room set, and the flat-screen TV offer disappears quickly. Admittedly, incentives aren't a big factor for national retailers, but they can be important to specialty merchants.

Two other keys to good incentives are that they must be beneficial and perceived to be of good value. Some unique incentives are:

• Free or discounted space planning and design;

• Pylon sign rent rate holiday;

• An owner-provided grand-opening advertising package;

• Leasehold improvement financing;

• A free standardized staff sales-training program;

• A period of business mentoring;

• Free or discounted visual merchandising; and

• Annual marketing assistance.

Any incentive should be dependent on the potential tenant meeting due diligence requirements, signing a valid lease, and actually opening for business. Some incentives can be back-ended—that is, they start after the tenant has been open for a period of time. And in the case of any financing-related incentives, the owner will want to legally protect its position and interest.

Use Targeted Prospecting

Any good leasing agent will want to know what national and regional tenants are in each of the owner's properties, if there's more than one. The existing relationship can then be leveraged into the other properties. Using the roster of specialty retailers and leveraging them into other properties or other concepts is less common. This may require an incubation period and/or the use of incentives. Again, proper due diligence is required, but not necessarily much more than would be conducted for any other specialty retailer.

“Targeted prospecting—either tenant specific or category specific—is another creative way of filling vacant space. Targeted prospecting in itself is nothing new. The creative target-prospecting program budgets specific dollars to create detailed information that will interest the particular prospective tenant. A targeted leasing package should contain: (1) market information, such as specific market potential estimates applicable to the target, ideally from a verified third-party source; (2) artist renderings of the storefront; and (3) competitive analysis. The marketing material may be packaged and delivered creatively.

Cultivate Brand Development

Developing a brand for your properties and company has become more important as the retail field has become more competitive. This consists of more than attaching the same name to every property. The branding has to say something about the way you conduct business and differentiates your offer from the balance of the pack.

Unfortunately, branding takes time and won't immediately fill vacancies. But it can pay dividends. For example, more than one large retail property owner has wanted to bolster its specialty tenant base. To do so, some have created various contests rewarding successful local retailers. In one case, an owner rewarded an existing and successful local retailer in the market with a cash prize to be used toward opening a store in one of its properties. In another, the prize was based on the business plan of a new venture.

The programs were designed so the owner also developed a prospect list of local retailers interested in relocating or adding another location, which it could use for follow-up leasing calls.

Where Does the Money Come From?

Many of these creative incentives can be offered at little or no cost to the owner. And remember that other costs will be directly tied to securing a lease, so if there is no lease, there is no upfront cost. All owners should analyze their lost opportunity costs associated with vacant space and determine the cost benefit of any expense, though. Even one month of vacancy can cost more in lost revenue than many of these suggestions, depending on the size of the space. Filling a vacancy faster as a result of using these programs can pay off.

Traditional, tried-and-true leasing processes and techniques remain the backbone of all leasing. But some creative leasing may invigorate your existing strategy and add value to your investments.

Peter Morris, SCLS, SCSM, SCMD, is the owner of Greenstead Group LLC and is a commercial leasing expert specializing in investment returns in retail real estate.