Mood of crisis

It may provoke one or two to spontaneously express their sympathy for a suffering member of the leasing fraternity. And, true enough, there are certainly lessors of shopping centers, retail parks, shopping arcades and similar retail agglomerations who are hoping and praying for an end to the general mood of crisis so that they can finally fill the vacant properties that have sprung up all over the place and which it has been impossible to lease on a long-term basis in recent times despite the offer of all manner of special terms, such as rent-free periods, extremely low rent or contributions to construction costs. Though, after the official end to the crisis, some may still be surprised to find that there is no improvement in the demand for their real estate.

Other lessors, on the other hand, are finding that, with the right product and a sustainable leasing strategy, it is still possible for them to lease all their properties on reasonable terms even under present market conditions.

Tenants looking to expand

Let us consider the market from the point of view of tenants who are looking to expand. Anyone who has managed his business successfully and is therefore in a position to expand using his own resources or with solid funding has access to a whole range of rental options thanks to the increased level of fluctuation. These include good city center locations as well as spaces inside shopping centers. A contributing factor are the numerous insolvencies recently, particularly with huge department stores such as Karstadt, Hertie, Woolworths, Wehmeyer, Sinn Leffers, Pohland and Kenvelo, to name but a few.

Admittedly, the number of insolvencies has also risen in centers managed by ECE, but at 1.2% this is still very low compared to the total number.

The limited expansion activity of many chain stores – whether as a precautionary measure or due to the reluctance of many banks to grant credit to fund new retail space – also plays a part.

Operators who are keen and able to expand are therefore spoilt for choice when it comes to locations and are usually in a very powerful negotiating position with lessors who cannot counter their requirements with a strong offer.

Sustainable leasing concept

From the lessor’s point of view, the major challenge lies in making the space for rent as appealing as possible to the potential tenant without overlooking the importance of cost efficiency. This calls for space flexibility – the space must be largely adaptable to tenants’ requirements in terms of size and shape. There must be the option of merging or dividing spaces as required and of combining this with corresponding investments on the part of the lessor. These investments, which must take into account future market requirements, also need to be a good prospect for refinancing.

Only those who can provide a sustainable leasing concept can hold out any hope of obtaining the necessary resources for their activities in the capital market. A leasing concept of this nature is naturally easier to develop and realise in a shopping center than in a free-standing property where there is a very high level of dependency on individual tenants. Successful centers have a varied sector mix, a balanced ratio of large, medium and small spaces, as well as an operator structure that combines a blend of national and international chain stores, regional operators and so-called “lone fighters”.

The maintenance of an effective tenant base, the sensible further development of successful concepts and the constant search for new and unique suppliers make the difference.

Reduced susceptibility to crises

This level of complexity reduces the susceptibility to crises right from the outset given that the dependency on individual operators or sectors is less pronounced. It is very rare for every retailer inside a center to be affected by declining sales to the same extent and at the same time.

The loss of individual operators can often be compensated for quickly and easily by relocations or space expansions by other tenants. An interim rental within the framework of a short-term tenancy agreement does not have to be inconsistent with a sustainable leasing strategy but can even be a part of it as a way of avoiding a new long-term lease at a lower rent. A new ten-year tenancy agreement – at the original rent at least if possible – can often be concluded again once the positive trend has been restored in the market environment.

Early warning system

If the lessor is a professional center operator he usually has early knowledge of which concepts are “struggling” thanks to monthly or quarterly revenue reports from rental partners which provide an indication of trends inside a center. Collating these figures at regional, national or even international level allows relatively quick and reliable predictions to be made about the sustainability of certain retail concepts.

Ongoing communication with rental partners at local and trans-regional level supports these activities. On this basis, measures can be devised that must be appropriate and effective.

Solutions

These definitely do not include the blanket and simplistic rent reduction wishes that have been voiced by some tenants under the cover of the financial crisis without any economic justification for them. Every bit as unhelpful is the pressure exercised by some rental partners for the early closure of unprofitable stores without any regard for the interests of center operators and owners.

Rather, a leasing strategy in times of crisis must be geared towards a precise analysis first of all of the situation of retailers suffering from falling turnover and rising rental percentages – in relation to each individual location in the case of chain stores. In addition to conceivable turnover-boosting measures, which professional center management can offer, there is sometimes a need for very specific economic support measures that are fair, responsible to investors, measured, situational and of a short-, medium- or long-term nature.

A constant and consistent attitude must be adopted by the lessor as standard here; there is no point in short-term hasty decisions. This way the lessor also remains dependable in the tenant’s eyes. This approach is based not only on revenue reports from the tenant but also on other business data that the tenant supplies via his tax consultant which must provide an overview of his actual economic situation. In addition, the concept in question must be sustainable, with development only hampered temporarily.

In the event of any necessary subsequent changes, balanced arrangements are developed that are fair to both parties in terms of opportunities and risks.

Opportunities

Even if, in individual cases, some measures may be grim for one retailer, they represent, at the same time, a chance for new market participants, enabling them to take up spaces in existing properties that would otherwise have been occupied for years. One man’s misfortune is another man’s opportunity.

Thanks to increasing verticalisation and internationalisation, these days there are undreamt-of possibilities for innovative concepts to penetrate new markets outside their respective domestic markets on adequate terms – and particularly with large spaces.

The following could be considered current examples: low- or off-price concepts such as Primark and TK Maxx, trendy fashion stores such as Hollister, the center-compatible subsidiary of cult US label Abercrombie & Fitch, popular suppliers with a growing global fan base such as Apple, or even the quality-driven supermarkets of Migros from Switzerland. These are all unfazed by the current market data and are instead looking to conquer new markets right now.

Market entry platform

For a lessor who can offer an extensive portfolio of superior locations, as is the case with the seventeen locations of Deutsche EuroShop, the potential for strategic partnerships here is very exciting. What could be more beneficial to the market entry of a new concept than a trusting relationship with a center operator focussed on sustainable and long-term success, who helps the tenant choose the most suitable locations? A location platform of such quality offers important economies of scale for professional tenants.

This is particularly valid since Deutsche EuroShop’s locations are well-established properties, which with their overall concept comprising innovative architecture, outstanding functionality, high-quality sector mix, a balanced tenant structure and professional center management offer precisely the type of added value that really sets them apart from other offers in the rental market in times of crisis.

Examples

The current expansion work at the Altmarkt-Galerie Dresden, the Main-Taunus-Zentrum or the recently added A10 Center is proof of this, given that these centers are enjoying very brisk demand from potential tenants. You will find some of the above innovative new concepts in these properties. It is all very exciting.

If we take the example of the Altmarkt-Galerie Dresden, the development of a successfully managed center is very much in evidence: from the “backyard location” viewed rather reticently in the boardrooms of some potential tenants for a first-time rental to the absolute “top performer” where it is proving virtually impossible to create enough space to satisfy demand despite the expansion work underway. Here too it makes good sense to have a sustainable leasing strategy because it may be possible, through the expansion, to further develop strengths, such as an individual and high-quality fashion offering, as well as to eliminate weaknesses, such as a fresh produce zone that is bursting at the seams.

100% possible

So what is the difference between leasing in “challenging” times and leasing when times are “easy”, if that has ever really been the case? Strictly speaking, not much. It has certainly become more time-consuming to find the right rental partner for a particular space at the right time and with an adequate rent. Where previously all it took for the conclusion of a tenancy agreement was a few telephone calls and the exchange of detailed information by e-mail, these days four or more rounds of negotiations are often needed. However, with the right product, a good dose of flexibility (from all concerned, namely tenants, lessors and owners) and hard work, it is still possible for every lessor to realise his dream objective: a 100% occupancy rate!