Genesco’s Loving the Landlords
By Tom Ryan
Genesco Inc., the parent
of Journeys and Lids, is clearly enjoying the leverage it’s gained on landlords
in the downturn. Besides outright rent reductions, CEO Bob Dennis said
money is being saved on remodels, new store openings and even in store
closing negotiations.
Speaking at Piper Jaffray’s retail
conference in New York City this week, Mr. Dennis said that for the first
time in "many, many years," rent per square foot is growing slower
for the company than its total square footage.
In terms of rent cuts,
Mr. Dennis noted that the company had renegotiated 181 leases across its
store base that were up for renewals or had kickouts in
2008, 2009 and 2010. Across the 181 lease renegotiations, Genesco received
a five percent reduction in rent on an accounting basis. On a cash-on-cash
basis, the reduction was in the double-digits. Mr. Dennis said, "That’s
a sizeable reduction after seeing rents going up greater than comps for
years." With 1,000 stores up for renewal or having a kickout clause
over the next three years, Genesco expects to pick up 30 basis points in
operating margin improvements.
In conversations when
closing unprofitable stores, Genesco has been able to achieve "very
meaningful" rent reductions as landlords have become more eager to
keep stores from going dark.
Meanwhile, the cost of
remodeling stores has "gone down dramatically." Although this
is partly because contractors are more flexible around pricing in the current
environment, the bigger reason is because landlords have become
"much more flexible." In the past, landlords would demand the latest
– and often most-expensive – upgrades in remodels, but have softened
those stances. "Now we’ll remodel with a little paint and carpet, which
is the right answer now from an economic standpoint," said Mr. Dennis.
Regarding
new stores, Genesco is opening significantly fewer stores in 2009 than
last year, but the stores being opened are negotiating attractive lease
rates. Both its Journeys and Johnston Murphy chains are either getting
into malls that were unreachable before or accessing better spots in some
malls – both at attractive terms.
However, a Reuters article implied that landlords weren’t
doing enough to offer concessions to avoid vacancies. In 2008, the amount
of space occupied by U.S. retailers fell for the first time since 1980
and has yet to recover, according to research firm Reis.
In the article, Nina Kampler,
executive vice president at Hilco Real Estate, said she expects more retail bankruptcies
ahead as consumers file for personal bankruptcy. This could lead to another
rash of store closings that could further squeeze landlords.
"The consumer is disincentivized by
a dark miserable experience," Ms. Kampler said. "It
is depressing to be in a place where nobody else is."
Discussion Question:
How might the shift in leverage from landlord to retail tenant in lease
negotiations reshape the retail climate, particularly the mall? How should
retailers look to further capitalize on any newfound rent leverage?
Does it seem that landlords are doing enough to keep stores from going
dark?
I am astounded that landlords would allow their space to go dark in lieu of negotiating friendlier terms for their tenant. Yet we cannot escape this phenomenon in the mall and on the avenues. This article is a testimonial to the business savvy along with negotiation and communication skill of Genesco.
Maintaining some cash flow by accommodating retailers seems like a no brainer. Yet so many store fronts go dark quickly with no replacement for the long term. It’s the absolute opposite of what should be happening. In that situation the landlord has a double negative outcome. First, there is a complete loss of income for the space and second, the adjacent space is less attractive to shoppers which leads to a further downturn for those retailers, then the landlord and so on and so on.
I attribute these poor decisions on the part of landlords to lack of business sense. Taking a hard line position is a no win proposition in this economy. However, the onus is on the retailer to communicate to the landlord the advantages of keeping the tenant. Genesco has taken on the responsibility for the landlord while investing in their own long term success. Kudos to Genesco.
I agree that it’s hard to believe that the commercial landlords who own all this empty retail real estate won’t allow more concessions on rent rather than letting the property remain empty. Retail of all shapes and sizes is, of course, affected. Big Box retail, malls, strip malls and yes, car dealerships present unprecedented opportunity for retailers to take advantage of a renter’s market. Properties that have been unoccupied for more than a year hold the greatest bargain potential.
I actually called on a vacant car dealership here in Southern California. The building is modern, upscale, a great location. There are so many businesses that could go in there. In this case, the owner was ready to deal, so retailers should step out of their traditional site selection process and investigate some otherwise unexpected opportunities in the market now.
The landlord has to walk a fine line between making concessions and still operating at a profit. If you make concessions to a tenant who is in trouble, and 3 months later the tenant closes up shop anyway, what has the landlord really gained? Some tenants are definitely worth keeping, but for retailers that are about to go under anyway, concessions don’t help and set a bad precedent. It’s definitely a gamble and sometimes there is no perfect solution.
While commercial real estate is outside my strike zone, I wonder how much of this negotiating tension between retailer and landlord is over future rent escalators. I would think landlords would be perfectly willing to offer significant concessions over the near term, but be very reluctant to lock those concessions in over the longer term, while retailers are looking to take this moment to lock those very concessions in for as long as they can. I would imagine it would give landlords pause….
Steve and Barry’s (God rest its soul) was an example of a mall retailer that strong-armed landlords into favorable leases; something that was touted as an innovative business model for a while (S&B drives mall traffic; landlord pays for the extra footprints). Alas, it didn’t pump up the bottom line enough to make up for low-margin business.
My hope is that favorable leases won’t encourage retailers to over-expand; or fool others into over-estimating the benefits.
Historically, we have talked primarily with landlords. The concern they have is that some retailers are trying to take advantage of the current environment to win concessions they don’t need. It’s also hard to reconcile what some people are reporting. Some retailers are saying they’re getting concessions while some landlords say they’re only granting concessions in a tiny minority of cases. So what is actually true? I find it’s difficult to get a true read of the concessions situation. Also, I think landlords might be more likely to give other concessions besides lowering rent–say lower CAM fees or periods of free rent–things that don’t actually change the bottom line rent numbers.
It would be useful to hear more from the heads of real estate at retailers as to what they need in this climate.