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One of the biggest leasing challenges faced by our team at Progressive Real Estate Partners is the lease-up of the last few spaces in a shopping center.

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challenges solutions of leasing the last retail

Challenges & Solutions of Leasing the Last Retail Spaces in a Shopping Center

One of the biggest leasing challenges faced by our team at Progressive Real Estate Partners is the

lease-up of the last few spaces in a shopping center. Although the retail industry has benefitted

from over 5 years of economic expansion, a changing market has resulted in the downsizing or

elimination of many retailers and that, combined with center use restrictions, makes it more difficult

to lease the last spaces.

Prohibited uses generally fall into one of the following categories:

Uses Prohibited by Zoning: Zoning dictates which uses are allowed, which are allowed

conditionally (subject to city restrictions), and which are prohibited. Unless it is a significant

transaction, leasing agents usually cross prohibited uses off the list. Even conditional uses

may get stricken if the City makes it fairly clear that a use is not going to get approved. For

example, a liquor store may be allowed on a conditional basis in certain zoning, but because

the property is immediately adjacent to a school, the City may tell you straight out that you

can apply BUT there is no way the use will get approved.

Uses the Property Can’t Accommodate Due to Parking: Restaurants, hair salons, health

clubs, and medical offices are the type of uses that may trigger increased parking

requirements. If you don’t have adequate parking, you may not be able to consider these

uses.

Uses Prohibited by CC&R’s: If the shopping center has CC&R’s (conditions, covenants, and

restrictions), there may be certain uses that are prohibited. It is not unusual in a larger

shopping center, particularly one built 10+ years ago, for the following uses to be prohibited

–fitness clubs, medical offices, massage “parlors”, any place of assembly, entertainment

uses, and others. Unless there is an incentive for the parties with approval rights over the

CC&R’s to allow a prohibited use, you can also cross uses precluded by the CC&R’s off the

list.

Uses that Violate a Tenant’s Exclusive: Many sophisticated tenants ask and often receive

exclusives that prohibit other tenants from operating certain uses within the shopping

center. Worst yet, in some cases an owner gives an exclusive and use language that is very

broad. For example, I recently encountered an exclusive for “Asian food” given to a quick

service Chinese restaurant. At a minimum, this eliminated Japanese food, Thai food,

Vietnamese food, a sit down Chinese restaurant, and Teriyaki chicken restaurants. These

types of exclusives knock out more of the potential new tenant prospects.

Landlord Discretion: Even though a use is allowed, a landlord may not want to lease to (for

example) a beauty salon if they have a Fantastic Sam’s because the landlord may be

concerned about creating competition for an existing retailer. The landlord may not want a

dollar store, tattoo studio, or smoke shop in their property due to concerns about image and

tenant mix.

So what is a landlord and leasing agent to do when so many “round holes” are already filled with

“round pegs”. Recognizing that there are fewer retail uses and retailers in the market, here are a

few recommendations:

City Relationships: Both the landlord/owner and the city should work together to develop a

good working relationship. A broker can also add a lot of value if they have good city

relationships the property owner should develop

relationships. The property owner should develop a good rapport with planning and other

departments so that when help is needed, the city already understands the property, the

leasing challenges, and the owner’s intentions for giving the City what they want (frequently

this is simply taking good care of the property) in exchange for their support of certain uses.

Parking Studies: An owner needs to know how many parking spaces they have, and the code

requirements based upon current uses so they know when they may have a problem getting

approval for a specific use. Many cities allow owners to perform parking studies to show the

true demand at various times of the day. For example, they may approve a fitness club

recognizing that this type of use generates the most traffic in the early morning, late in the

day, and on weekends especially IF many of the existing uses in the project are busiest in the

middle of the day.

Be Aggressive for Certain Uses: Many owners view that if they have 10 spaces and 9 are

filled, they should get the most rent from the last user. The problem is many of the existing

users may be able to afford top dollar and that is why they have been able to hold their own

over time. Also, the last space may be awkward in size or larger than most users want. The

challenge obviously is that the last lease signed frequently sets the market rate and could

significantly affect property value. I recommend explaining the issue to the tenant — that all

the other businesses in the center are paying higher rent — and then get creative with the

deal terms:

1.Offer above normal free rent

2.Offer an above normal tenant improvement allowance or do some of the work the

tenant needs to help get the business open.

3.Give the tenant a 5 year lease with a discounted 1st year rent with the right to cancel

after the first year if they just can’t make it work. If successful, then they need to

start paying the higher rent in year two.

Modify CC&R’s: Sometimes multiple owners will have the same issue within a center and it

is time for someone to take the lead and address this challenge with the different owners.

This can be difficult especially if you have an anchor tenant with no apparent incentive to

make a change, BUT if you can convince them that the health of the center will deteriorate

over time without changes to the CC&R’s or that because of the changes, they will likely end

up with more customers, you have a chance.

At Progressive Real Estate Partners we’ve found that a leasing agent works best with an owner that

allows the agent to take “square peg” tenants and creatively figure out how to get them to fit in the

“round holes” that you are BOTH trying to Retail Space for Lease.

Article Source: https://www.progressiverep.com/challenges-solutions-of-leasing-the-last-

retail-spaces-in-a-shopping-center/.