Let's make a deal.
In the fierce race to attract retail tenants that generate buzz, landlords are becoming increasingly generous in their leases.
With the retail industry in flux from the surge in online shopping, the tenant mix is more crucial than ever. Landlords are realizing this, experts and brokers say, and bending over backward to get coveted tenants, especially for stores outside malls.
Commercial firm CBRE predicts that more landlords and developers will embrace flexible lease terms to secure trendsetting stores and attractions that draw shoppers.
"We're seeing more instances of landlords taking equity stakes in popular new restaurants in exchange for lower rental rates," said Washington-based Melina Cordero, CBRE's head of retail research in the Americas. Landlords are also allowing more percentage rent and making greater contributions to tenants' build-outs, she said, such as better flooring, piping, and ventilation.
The trend is evident in many recent Center City retail deals.
Andi Pesacov, senior director of retail services for Cushman & Wakefield, recently brokered a deal to get City Fitness, a health club, to commit to 40,000 square feet of space in the Sterling Building at 1815 JFK Blvd.
Last month she also represented the tenant and landlord in the deal for the national crafts store chain AC Moore to open its first urban location in Philadelphia. AC Moore is moving into the former F.Y.E. space inside the Land Title Building at Broad and Chestnut Streets.
"Landlords will commit to build out the tenant's entire store if the tenant is paying a higher base rent, in addition to larger percentage of rents of gross sales," Pesacov said. Tenants are "acclimating to their environment, adding nontraditional merchandise, such as furniture, hard goods, and classes, and now often offering food and beverage options. It's an interactive shopping experience that many retailers are striving for today."
The City Fitness deal was similar. Pesacov said she brokered an extended lease term for the tenant with "a lot of additional free rent upfront from the landlord and covered by the longer term of the lease." In addition, "it allowed the landlord to do the majority of the tenant build-out."
Pesacov said City Fitness is the largest health club to enter the city.
Denver-based Aimco owns the Sterling Building, which was completely renovated. "The 40,000 square feet is such a huge amenity for the building that they went out of their way to land the tenant," she said.
Pesacov said often, whatever sweetener the landlord offers "has to do more with square footage and cachet of the tenant and the cachet of the development."
"Landlords are giving more in the beginning [of a lease] and making up for it in the longer term," she said. "Everything evens out. These tenants are traffic generators and landlords reap the benefits, which allows them to make up the money tenfold. I started seeing this four to five years ago, but it's become more commonplace in the last two or three years."
CBRE Inc. executive vice president Larry Steinberg has brokered deals for Target, Warby Parker, Apple, and Center City's largest Wawa, the 7,000-square-foot store at 19th and Market Streets.
"Landlords are definitely making more concessions to attract anchor-quality tenants," Steinberg said last week, standing before the Target where he represented the landlord. "When retailers such as Target arrive, landlords offer more in build-out, aggressive rental rates, and free-rent periods. These concessions are needed to sign deals today with high-quality, desirable tenants."
But Pesacov said street retail is much different from mall retail, where the incentives will be less, or even nonexistent, depending on demand for the space — something acknowledged by Joseph Coradino, CEO of Pennsylvania Real Estate Investment Trust, which owns several malls here, including Cherry Hill and Plymouth Meeting.
PREIT is seeking replacement tenants for the Macy's stores at Plymouth Meeting and Moorestown Malls, which parent company Macy's Inc. announced this month would be closing by the end of the first quarter of 2017.
"For PREIT, we sort of see the opposite happening where we have more than one retailer interested in our space, so needing to incentivize retail tenants is not something we personally see right now," Coradino said.
PREIT can "evaluate which tenants are the right fit for our properties," Coradino said. "It's not always as simple as a pure economic decision; it really does come down to a balancing act of creating a mix of hot, in-demand retailers, off-price retail, dining, and entertainment that enhances the existing roster and is suited for shoppers' interests."
Restaurant concepts have become a popular replacement both in malls and on the street.
Lars Kerstein, vice president at Metro Commercial, represented Ruth's Chris Steak House in 2015.
"Many landlords who are trying to either fill hotel rooms, increase office/ apartment rents, or drive more people to a shopping center are interested in having Ruth's Chris tenant prime restaurant space," Kerstein said.
In the Center City deal, he said, the landlord agreed to contribute financially to help in the build-out of the restaurant. Ruth's Chris opened about 18 months ago at 1800 Market St.
Tom Sebastian, senior vice president of development at JBG Cos., the developer of the $100 million King of Prussia Town Center, said that "landlords in today's economy are sometimes required to be more creative in order to strike a deal with a desirable retailer."
He said one example JBG has used is called a reverse build-to-suit.
In a traditional build-to-suit structure, Sebastian explained, the landlord designs and constructs the base building for the tenant. But with a reverse build-to-suit, "we provide the solo tenant with a dirt pad and funding to construct the building based on their own unique design."
Sebastian said this structure is often preferred by health clubs and movie theaters, which want the architectural design to reflect the brand.
Brandon Anapol , senior vice president at Metro Commercial, is representing a large-format fitness concept coming to the Philly region for the first time.
Landlords are getting more creative and retailers that "are integrating brick-and- mortar with an online presence to create a seamless and cool experience are going to be the ones that will thrive," he said. "We are just at the tip of the iceberg.
"Five years ago, you would have never thought of [replacing] a prime, mid-box location with a fitness center, but because of this paradigm shift [to nontraditional anchors], landlords are adapting, and retailers in shopping centers are much more receptive to the change because they would rather have a traffic driver providing energy and synergy than a vacant box."