The only thing more dangerous for America’s malls than a string of apparel-chain bankruptcies is when the trouble hits department stores.
Retailers like J.C. Penney Co. and Macy’s Inc. are considered “anchors” that keep malls humming and foot traffic flowing. They’re so important to the ecosystem that smaller tenants may refuse to set up shop without a promise that the anchors will stick around: Many leases include so-called co-tenancy clauses that let them cut and run or pay less if those key tenants depart.
Now, many landlords are pushing to eliminate or narrow the escape clauses in the wake of mass department-store closings. That means less flexibility for the remaining tenants.
“Most retailers based in a mall do live or die based on an anchor,” said Andy Graiser, co-president of A&G Realty Partners, a commercial real-estate adviser. “Certain retailers are going to have a risk if certain anchors go away.”
The past couple of years have brought hundreds of department-store closings. This is the result of of liquidations (Gordmans and Bon-Ton Stores Inc.), restructuring by struggling chains (Sears Holdings Corp. and J.C. Penney) and pullback by relatively healthy operators seeking to downsize their store presence (Macy’s, which is closing underperforming stores).
While retailers are still flocking to the high-income “A” malls that make up about a third of enclosed centers, lower-tier properties are often struggling to replace lost merchants, sometimes turning to non-traditional tenants such as urgent-care centers.
Landlords are now routinely pushing to chisel away co-tenancy provisions when leases come up for renewal, said Ivan Friedman, head of RCS Real Estate Advisors, a New York consulting firm. That wasn’t the case even a couple of years ago.
That will have consequences, such as leading to fewer lease renewals, said Kent Percy, a managing director at consulting firm AlixPartners.
“They could lose the whole inside of the mall,” he said. Percy and others did note that even robust co-tenancy clauses offered limited protection for tenants; landlords are inclined to push back on any legal lease-breaking, and the cost of battling them can be prohibitive.
Many of those interior tenants have already suffered mightily, leading to bankruptcies like Gymboree Holding Corp. and Rue21…