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The Warsaw Voice » Real Estate » October 28, 2009
The Real Estate Voice
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Tenants Wary During Crisis
October 28, 2009   
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Extra safeguards for shopping chains and lease negotiations that last twice as long as before-these are the two most visible signs of the crisis when it comes to finding tenants for shopping centers.

At the beginning of this year, shopping chains started to revise their expansion plans. Since then several bankruptcies have been declared and some tenants have abandoned the retail space they occupied. And there have been even more serious problems.

"At present finding tenants for a shopping center takes much more time than in previous years. Negotiations last longer because tenants pay much more attention to examining the project and studying the details of a contract," says Magdalena Frątczak, retail director at real estate services company CB Richard Ellis. "Tenants are taking their time. They are now looking at new locations much more carefully than before because they know that, say, they will open only 10 new stores instead of the 20 planned initially. Earlier, they wanted to be present in most of the newly opened large premises. Now they have to choose."

Individual choice
A factor which prospective tenants now take into account more often than before is how advanced the project is in terms of construction works and the process of renting out the shopping space. They check whether the opening date has been postponed. If they sign a lease contract at an early stage, they reserve the right to cancel it if, for example, the developer fails to obtain the building permit by a set deadline. Investors, meanwhile, do not like to sign contracts burdened with such conditions, but inquiries of this kind from tenants are increasingly common.

What else do shopping chains take into account when choosing locations for their stores?

"We consider every project on an individual basis and do not have fixed criteria that have to be met for us to take an interest in the facility," says Dariusz Pachla, vice-president of clothing company LPP, the owner of the Reserved, House and Mohito brands. "We want to open stores in every place which we regard as attractive and promising from the point of view of expected business benefits. We take into account the premises' surroundings, the rental price, attractiveness of individual retail outlets, and the presence of other companies. A large facility in a good location has a chance of drawing many customers, but this does not mean that a store located there will be the most efficient one. It may turn out that a store located in a small facility, but rented at an attractive price, will generate substantial profits for us."

Slowdown in small cities
Among the trends noticed recently by market analysts is that shopping center investors have been turning their attention again to large cities. The amount of retail space available in smaller cities, with populations below 400,000, was expected to increase considerably in 2010-2012. But now projects planned in small and medium-sized cities, which are much less resistant to the crisis than bigger cities, will be especially affected by the scaling down of investment plans, according to a report from real estate services company Jones Lang LaSalle.

Irrespective of the crisis, some tenants are not going into small cities, with less than 100,000 residents, at all.

"Every tenant has to achieve a planned level of sales," says Frątczak. "Brands such as Zara, for instance, which target their products at the upper middle class, do not want to open stores in small cities because their customers are either not present there or the number is very small. And this means that the smaller the city, the narrower the group of potential tenants."

But apart from the size of a city, tenants also take a variety of other factors into account. "Whether an urban center is inhabited by more than 100,000 people or less is a piece of information that in itself does not provide a picture of its potential," says Pachla of LPP. "First, one needs to answer a number of additional questions: Do the residents of the city have well-paid jobs? What is the distance to other urban centers? Is it the first facility of this kind in the area? What are the plans of other investors for the region? And it is only such analyses, which we conduct when considering any location, that provide a basis for decisions on renting space.

Regular tenants
There is a group of tenants who are present at any shopping center. The group includes a food chain, several fashion brands for the whole family, for example Reserved, H&M, C&A or brands from the Inditex group-Zara, Bershka or Stradivarius. Such brands are usually the first to become tenants in a shopping center and they encourage other chains to rent space in the facility.

Last month, developer Globe Trade Centre (GTC) opened the Galeria Jurajska shopping mall in the southern city of Częstochowa, with 200 stores, service outlets, eateries and a Cinema City multiplex on 49,000 sq m of retail and entertainment space.

"In Częstochowa we wanted to reproduce our best concepts and we succeeded. The plans of large chains coincided with our ambitions and it enabled us to carry out a successful project," says Monika Janczewska, director for property lease at GTC. "Alma, Cinema City, Avans and Euro RTV AGD provide a base that ensures Galeria Jurajska has a universal character and means that it is targeted at a wide group of clients. This profile is supplemented by Empik, Intersport as well as Dziecko and Smyk, brands dedicated to children and parents. Fashion chains-Peek & Cloppenburg, Zara, Reserved, H&M, C&A, S. Oliver, New Yorker, Bershka, Stradivarius, Kappahl, Cubus and Mango-complement the whole. But brands that make the project attractive are not only large stores, but also well-known global brands like Max Mara, Tru Trussardi, Liu Jo and Penny Black."

Shopping centers usually choose one of a range of plans for distributing tenants in a facility. Customers will stay longer in the center if the dispersion concept is applied, which means that stores of the same kind, for example selling footwear or interior decoration articles, are located in different parts of the shopping mall. Another widely applied concept, one much more convenient to shoppers, is grouping tenants who sell similar articles together. Under this concept, Smyk would be surrounded by other chains selling clothes and toys for children while smaller stores with interior furnishings would open close to Euro RTV AGD.

Services are located opposite the supermarket while the food court with restaurants and cafes is usually on the first floor. Consumers spend a lot of time in this part, they take a rest, talk and eat, so stores visible from the food court are popular with tenants.

"Galeria Jurajska is to a large extent laid out according to the type of goods or services on offer so as to make it easier for customers to move around and make shopping more convenient to them," says Janczewska of GTC. "This is why chains like Alma, Avans, Euro RTV AGD, Superpharm with a pharmacy, Rossmann, Sephora and Douglas are grouped together on a single floor. And most fashion brands are on the same floor as Cinema City and the food court. These are well-tried concepts, with which customers feel comfortable."

Location, location
In the second quarter of this year, the highest rents in Warsaw's shopping centers were up to 83 euros per square meter a month, according to real estate services company Cushman & Wakefield. The highest rents in other large Polish cities were much lower, at 46 euros per square meter a month in Cracow, 44 euros in Poznań and the Tricity of Gdańsk, Sopot and Gdynia, and 40 euros in Szczecin and the Silesian conurbation.

"Usually, the most attractive and at the same time most expensive locations are stores situated close to moving stairs or elevators," Frątczak says. "Cafes like to be located at the corners, close to stairs. Tenants who need a large shop window tend to occupy stores at intersections of aisles. Another advantage is good location. As a result, rents for stores close to strategic tenants are higher."

Janczewska adds that "prices depend the most on store size, sector and exposition, that is the width of the shop window, and location in a row of stores or on a corner. Also important is the shape of the store, its symmetry and whether its proportions are good for a given sector or brand."

Chains preferred
Owners of shopping centers prefer chains as tenants. However, inquiries also come sometimes from local brands and traders.

"I think that 85-95 percent of shopping center stores belong to large chains. A store that does not have a recognizable brand has slim chances of successfully coping with competition in such shopping malls," Frątczak says. "Shopping chains have appropriate know-how. They know how to recruit and train personnel and how to display their products. Despite that, smaller local firms also try to rent space in shopping centers. Jewelers, pharmacies and firms offering such services as gift packing cope very well in this situation."

Demand is the main barrier to the expansion of tenants. Until recently, there was a shortage of modern retail space, but now large and medium-sized cities offer such space. New centers are under construction despite the crisis.

"The potential for expansion is still considerable in Poland, despite the fact that the number of modern shopping centers has increased significantly over the past several years," Pachla says. "We are still opening new premises and increasing our shopping space by over 20 percent annually. Some of these are new locations, mainly in smaller cities, some are new centers in attractive, newly developed parts of large cities. And finally, some are modern premises located relatively close to older ones, which have lost their attractiveness to the consumer over the last 10 years."

Frątczak says the fact that modern space can only be found in shopping centers is a certain limitation.

"We do not have genuine shopping streets, like the ones British people are accustomed to, for instance," Frątczak says. "Several British chains are postponing their entry to Poland for this very reason. And finally, it is worth remembering that the expansion of shopping chains has been hampered by the policy pursued by banks, which do not give them loans for development. Everyone has cut costs and will certainly be keeping them in check for the next several years."

Magdalena Fabijańczuk


Commentary:
More Clauses, Less Confidence
Grzegorz Mroczek, director for property lease at Caelum Development:
Any crisis changes both the strategies and expectations, reflected in lease agreements for shopping space. In a crisis, few people are satisfied and correct contract provisions are especially valuable.

It is standard market practice widely approved by both developers and tenants to sign lease agreements for five or 10 years, with a slow trend towards shortening the length of agreements from 10 to five years, a period which is theoretically more predictable. But one should remember that a long-term agreement gives tenants an additional opportunity to secure lower rents over a longer period and benefit from more convenient rental conditions assuming that rental costs will rise.

The most important change during the crisis is that tenants have started to use a clause which sets the date by which the facility has to open and which gives the tenant the right to cancel the contract if the opening is delayed. It is connected with a crisis of tenant confidence in developers because of long delays in project completions, mainly due to a shortage of funding. Tenants are not without fault either. Developers are disappointed by the attitude of many tenants, even chains, who do not pay rent on time and fail to complete finishing works on their stores early enough. As is the case with developers, this is mainly a result of a limited funding capacity. In the near future, this will undoubtedly lead to provisions designed to reduce the developer's risk.

Let us learn from history. The winners again will be those market players who make the right decisions during the crisis, take advantage of the opportunity and make a profit once the market has revived. Then, there will be fewer opportunities again until the next crisis.
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