The tenants’ revolt

Shopping centres are currently at the point of the cycle when tenants can afford to negotiate discounts and additional services. However, this is not the case everywhere. If you have built a superior shopping centre in a prime location, you can still dictate terms – regardless of the state of the market

Emil Górecki

It is too early to talk about the end of the decline of retail rents in Poland. Research shows that rents are not going down in prime locations, but this is not representative of the shopping centre market as a whole. In inferior locations and smaller towns, rents might still be going down, but at a slower rate than in 2009. “Reductions are most evident in effective rents. The landlords and property managers of retail facilities are first of all focusing on the rental rates stipulated in contracts, as these directly translate into the shopping centre’s value, so they have to be at a high enough level. However, for those facilities with high vacancy rates, landlords are more likely to give bigger discounts. Therefore it is relatively easy to negotiate longer rent holidays and higher amounts for putting the finishing touches to the retail space,” explains Karina Kreja, senior analyst at CB Richard Ellis.

Unwelcome series of events

Are reductions in prices a direct result of the crisis or the lack of retailers willing to open their outlets in shopping centres? According to Edyta Potera, associate director of the retail agency at Jones Lang LaSalle, the problem is more complicated. “There have been a number of factors contributing to the temporary reductions in rental rates, such as the last few years of turbulence in the global financial sector, the high exchange rate of the euro, low retail sales dynamics – which contrast strongly after the excellent results in 2006-2008 – as well as the financial problems of many companies, which have so far implemented ambitious expansion plans, and the higher accessibility of space for lease. Rents in the leading malls have stayed at the same level, while in lower quality facilities with weaker selections of tenants in towns and cities saturated with retail and in worse locations, there has been a reduction of 10-20 pct on average. However, we are expecting an upward trend by the end of 2010,” argues Jones Lang LaSalle’s expert.

Talk of there being a tenants’ market is only a signifier of a potential trend, and analysts often frown at such generalizations. According to Karina Kreja: “In places where the market is not saturated, such as in Warsaw or the Silesian conurbation, the negotiating power of tenants of the best projects is not, was not, and will not be significant for some time. It is different in towns where the supply of modern space in shopping centres is high, e.g. in Płock or Bielsko-Biała, where tenants can pick and choose.

The fight over marketing

The tenants of facilities that started up just before the crisis and have since not managed to make their brand names well-known often face serious problems. In some cases tenants have organized themselves to associations in order to protect their interests. A few weeks ago, retailers in Bonarka City Center in Kraków complained to the owner TriGranit about the marketing director of the shopping centre. The tenants were not happy with the marketing policy of the mall, and the lack of coherent communication and any possibility to measure these activities. The tenants are also waiting for improvements to the access to the centre by public transport, which was promised by the developer during negotiations. The property manager of the facility rejects the complaints, and there are also a number of tenants who do not agree with them either. “It looks a little like a bit of a witch hunt: our turnover is not high, so we want to identify the ‘guilty’ party,” says a representative of a big non-food retail chain, who did not join the protest. “Although I do agree with a lot of the demands put forward by the tenants. We are also not happy with our recent results, with the footfall or the profile of the shopping centre in the city. However, we prefer to open calm negotiations rather than shout,” he admits.

Małgorzata Szychułda, the marketing director of Bonarka whom some of the tenants wanted dismissed, takes issue with the accusations. 
She emphasizes that only some of the tenants belong to the association, that the marketing of the facility has been carried out correctly and that the revealing of certain data by the tenants’ association was unfair. “There was a meeting of all the 
interested parties at the beginning of May. We are constantly in touch with the association and are working on the strategy for future action. We hope that we will manage to work out good 
solutions towards further co-operation during these internal meetings, which will hopefully 
satisfy both sides. We believe in the best and 
oldest method of solving disputes – dialogue, carried out without any unnecessary 
exacerbation of the situation,” believes Małgorzata Szychułda.

Major clothing chain LPP has not joined such an organization. According to the vice-president of the company, Dariusz Pachla, it is normal that shopping centres give better terms to large, well-known tenants first of all because of their scale, and secondly because these are the brands that attract customers to the mall. Smaller players do not have such strength, and this is why they tend to join forces. However, he goes on to admit that reductions in rent in the last few years have allowed the company to save money. LPP’s grounds for dissatisfaction include the increasing of a number of charges without giving any reasons, as well as a lack of information regarding the budget expenditure, for example, in terms of the marketing of the centre. Tenants have started to demand this, and have often been successful. “It was thanks to the crisis that we found out how far we can push the property manager, how much we can demand from it and which conditions are possible to negotiate,” claims the vice-president of LPP.

There have also been protests by tenants in a number of shopping centres that belong to Echo Investment. Since the beginning of the crisis, the property managers of these facilities have been introducing cost optimization programmes, and savings have been made through renegotiating contracts with suppliers. Only in the case of the company’s Pasaż Grunwaldzki centre in Wrocław did the property manager agree to lower the rent for some tenants until the end of 2009, particularly for the smaller and more vulnerable retailers. And this reduction was no higher than 10 pct. At the beginning of the year some tenants were also granted a prolongation of preferential conditions. However, in the company’s best malls, in Szczecin and Kielce, there were no such reductions. According to the property managers of these facilities, there was no such discussion since there was already a queue of companies willing to take out leases.

The property manager rules in Moscow

According to Maxim Karbasnikoff, European director and head of the retail department for Russia and the CIS at Jones Lang LaSalle, there have been a few similar examples of tenants organizing themselves to negotiate collectively in a number of shopping centres – especially in Moscow. This was first observed during the crisis at the beginning the present century, and the last time was during the first phase of the current recession. But in young markets such as Russia, tenants’ societies are rather small and not so powerful. “Tenant strikes and protests over high rents and payment postponements have not lasted long. And unfortunately they were also not very constructive. After such situations, property managers have invited individual tenants for meetings to talk about the problems. Usually they eventually come to an agreement,” says Maxim Karbasnikoff. “Even if the rents are high, tenants are not expected to wield much power in prime shopping centres in Moscow, due to the strong demand for space. Those who want to lease space in more ‘difficult’ projects have an easier task: vacancy rates are quite high and it’s now more problematic for property managers to attract retailers into malls,” he claims.

However, there are also some advantages to be had from this confrontation. “The crisis has divided tenants and landlords into good companies following healthy policies, and into those that lack professionalism. Additionally, these kinds of negotiations between tenants and property managers allow them to develop new modes of co-operation. Now both sides can become real partners,” adds Jones Lang LaSalle’s expert.

A flash in the pan in Hungary

The idea has also been floated for more intensive cooperation between tenants in Budapest. The intention is to establish a permanent, national organization. However, this initiative has yet to get off the ground, possibly because tenants can now choose from a much wider range of services in terms of representation, and possibly due to the lack of new projects and the subdued leasing market, with agencies’ efforts now being focused on the representation of tenants.

Rental rates in all retail sectors are declining, but this is not enough to make tenants happy. Because of the problems of the Hungarian economy, consumer demand remains at a low level. Gradual growth is expected to take place over the next two years while structural reforms planned by the newly elected government of the conservative Fidesz party will be introduced.

As a consequence, the most significant trends on the market include the renegotiation of contracts, a return to the outlet format, moving to smaller premises and even sub-leasing. A few years ago, landlords were reluctant to allow people to occupy their buildings with whom they had no direct contractual relationship. Now, however, they are exhibiting more flexibility, provided that sub-leases can guarantee financial liquidity.

The average rent level in Budapest has fallen to EUR 14-15 per sqm for the most important tenants, while smaller companies still have to pay EUR 40-60. Potential tenants are careful to open new outlets due to the risk this involves.

The grand opening of the Allee shopping centre in Buda (the southern part of the capital city) at the end of 2009 turned out to be a success for the developer, ING Real Estate. The complex was 100 pct leased and, according to reports, it is now generating healthy revenue. However, its opening has forced rivals to review their plans. The Corvin Atrium shopping centre, whose opening was initially planned at more or less the same time, is being held back for a year because of Allee. The facility, developed by Hungarian company Futureal, is owned by the French group Klépierre. It is in fact finished, but its tenants are worried about its location, which is only a few tram stops away from Allee. As a result of problems with its commercialization, the opening is to take place in November, just before the Christmas season.

Czech retail projects are also faced with a tenants’ rebellion. However, according to Denisa Gálová, the property manager of the Arkády Pankrác shopping centre in Prague owned by ECE Projektmanagement, the problem does not affect the best projects in prime locations. “Our shopping centre has been open for 1.5 years and we have had no signs of dissatisfaction from our tenants. There are no reasons why there should be: footfall is 20 pct higher and the turnover 10 pct higher than in 2009, which is a good result during the credit crunch. When it comes to de-commercialization, we try to keep rents at their 2008 rates,” explains Denisa Gálová. However, in the Czech Republic there have also been cases of tenants forming associations to negotiate rents and the level of additional costs. This has taken place in Galerie Nové Butovice in Prague and in Futurum in Brno. ν (written in co-operation with Gergo Racz)