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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 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 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
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
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
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 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
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-