Adjusting co-tenancy provisions to backfill closed anchor stores

The Great Recession has been a difficult time for retail in general and particularly for the shopping mall industry. With lower consumer spending and an increased willingness to shop over the internet, some have begun to write obituaries for enclosed regional shopping malls, but mall owners are adapting to the new trends. They are retooling the traditional shopping mall model, including replacing dormant anchor stores with mixed use life style developments. Landlords need to adjust co-tenancy provision to address these changes.

Traditional enclosed malls are built around department stores, typically 100,000 square feet or more, such as Sears, JC Penney, and Nordstrom’s. Those large stores have “anchored” traditional malls. The anchor stores have driven retail traffic and made malls attractive to smaller retail shops that rent space in the interior of the mall. Many retailers negotiate for “co-tenancy” protections that give the tenant a rent reduction–or even a right to terminate the lease–if the mall has less than a specified number of anchor stores open and operating.

In recent years the number of department stores has been on the decline. Mall owners with a shuttered anchor store are not likely to find another traditional department store to backfill the vacant space. Some closed anchors are being replaced with open courtyards, fountains and park-like features surrounded by specialty retailers, big box retailers, restaurants and theaters. In some locations, mall owners are also considering adding hotels, professional offices and even residential components in the place of empty department stores.

West County Center in the St. Louis area provides one example. In 2006 a 140,000 square foot Lord & Taylor department store shut down. The owner of the center demolished the building and replaced it with roughly 90,000 square feet of lifestyle development, including a Barnes & Noble, several restaurants and specialty retailers opening onto the exterior of the mall.

Other mall owners are also getting more creative, backfilling empty anchors with schools and children’s activity centers such as gyms and swimming pools. One developer even brought in a shooting range. Other landlords are adding fitness centers, dance studios and other non-retail users.

In light of these trends, landlords should be negotiating co-tenancy provisions that give them flexibility to replace closed anchor stores with other kinds of uses. They should consider the square footage required in the proposed replacements since much of the prior square footage of the closed anchor stores may be replaced with open air features that add value, but not leasable floor area. For instance, a 150,000 square foot multi-level department store may be replaced by only 25,000 or 30,000 square feet of specialty shops and restaurants.

Retail tenants who negotiate for co-tenancy provisions are pushing back against the possibility of replacing traditional department stores with other uses. They are skeptical that mixed use redevelopment projects will be able to drive as much traffic as a large department store. Landlords and tenants will continue to sort this out as the retail landscape changes.