Leasing Layers

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The Mercato, developed by The Lutgert Cos., combines Whole Foods...
Atlantic Station, whose retail is managed by Jones Lang LaSalle,...
Construction on Trinity Town Center in Pasco County, Fla., is...
In converting Echelon Mall to Voorhees (N.J.) Town Center, PREIT...

Imagine you’re leasing the retail component of a mixed-use complex: Maggiano’s or Catelli’s? A national restaurant chain or a local, beloved ristorante?

Just a few years ago, a leasing rep would have spent little time making the decision, opting automatically for the larger chain. But current leasing trends and an uncertain economic environment are encouraging mixed-and multi-use project developers to include more local and regional tenants in their mixes.

“The proportion of local and regional tenants is dramatically higher than in a power center, mall or a lifestyle center,” said Joseph Coradino, president of PREIT Services LLC and PREIT-Rubin, Philadelphia.

Pennsylvania Real Estate Investment Trust (PREIT), for example, is adding Maggiano’s to its expansion of Cherry Hill (N.J.) Mall—but its conversion of Echelon Mall to Voorhees (N.J.) Town Center, with retail and residential space, will add Catelli Ristorante, well-known in Southern New Jersey. Voorhees Town Center will see its first residential tenants in November, with the retail opening in March. The project will be complete by the holiday season in 2009.

The move defies what just a few years ago was conventional wisdom for a regional mall—leasing to the national, more credit-worthy chain.

“There’s clearly a higher element of risk on paper. This [Catelli] is not a Maggiano’s financial statement,” Coradino said. “On the other hand, here is an opportunity—if you find the right tenant, someone with a successful track record—to hedge that bet.”

Adding high-quality local food tenants can differentiate a mixed-use project, he added, particularly if one of the other uses is residential space. The result creates a marketplace feel.

A typical mall or power center may have dedicated only 10% of its mix to local and regional tenants, with the rest national retailers, whereas a mixed-use complex may reverse that—70% of its mix more regional in nature, with 10% to 30% consisting of national tenants, he added.

“We’re creating a real downtown environment without a lot of retail repetition from the usual suspects,” Coradino said.

PREIT is not alone in pursuing a greater proportion of regional tenants for its mixed-use projects. That trend toward the local is spreading nationwide, allowing projects to differentiate themselves and become real neighborhoods, rather duplicating lifestyle centers.

Local roots: “It makes sense to introduce more local tenants into the mix,” said Dougall McCorkle, VP of commercial development of Naples, Fla.-based The Lutgert Cos., which is opening The Mercato with 175 residential units, approximately 330,000 sq. ft. of retail space and 120,000 sq. ft. of Class A office space in Naples. Whole Foods Market opened in September, and the Main Street retail will open in February 2009.

The key, McCorkle added, is that the regional tenants are seasoned merchants who are capable of dealing with economic ups and downs.

Or those with the potential to do so, PREIT’s Coradino noted.

“If you go back to the roots of the business, mixed-use is finding the unique retailer with the potential to grow from a one- or two-store chain to a 10- or 20-store chain,” he said.

The key to finding these projects, then, is “shoe leather,” Coradino added, spending more time working with local boutiques and restaurants than upscale national chains.

That doesn’t mean the process is easy. In the midst of a downturn, leasing mixed-use projects offers unique protections for their owner/developers, and unique challenges, including lengthening negotiation times and tougher terms.

Blending uses: “The multi-use category insulates you more [as different sectors surge or recede at different times],” said John Bemis, executive VP and director of leasing for Atlanta-based Jones Lang LaSalle (JLL) Retail. In fact, retail tends to lag other sectors, usually feeling a lesser and later downturn than office space.

Mixed-use projects also can have an advantage in the diversity of their anchors. Atlantic Station (whose retail is managed by Jones Lang LaSalle) has created a new neighborhood in Atlanta, with diverse anchors including Dillard’s, Publix and IKEA, Bemis said.

To lease Trinity (Fla.) Town Center mixed-use complex, opening in phases through December, CB Richard Ellis utilized cable television and the CB Richard Ellis Web site to create buzz for the project’s 90,000 sq. ft. of retail and 80,000 sq. ft. of office space. Much like Voorhees Town Center in New Jersey, Trinity Town Center also will include a substantial percentage of local and regional tenants to differentiate itself.

“Because we’ve been proactive about other businesses that we wanted in the center, [tea retailer] Tealuxe came to us,” said Paul Aiello, a VP of South Capital Construction, Palm Harbor, Fla., which is building the project.

Office tenants are thrilled by the presence of retailers, Aiello said, while retailers and restaurateurs appreciate the steady base of office workers, particularly during daytime slow periods.

“It creates a symbiotic relationship,” he said. Ironically, that has made leasing Trinity Town Center more difficult than an outsider might expect, albeit for the best possible reasons.

“We get requests for uses that we have not contemplated,” Aiello said, adding that Trinity Town Center’s uses have been carefully allocated by the owner to create a useful downtown core for the community. “We want to create a family-friendly, safe environment.”

The mix will thus include a much larger proportion of unique boutiques and chef-driven, rather than chain, restaurants, as well as excluding sports bars, and liquor and convenience stores from the mix, while including such tenants as Bear Creek Coffee.

Still, with so many national retailers slowing their expansion, those tenants who are opening new units are pushing hard to change the terms of their leases, looking for a more favorable deal, JLL’s Bemis reported.

“But developers and owners are pushing back fairly hard,” he said. Few, if any, developers are settling for lesser deals, though they are working with tenants to attract and keep them.

“You’ve got to be flexible with your tenants to keep them in place,” said McCorkle of The Lutgert Cos. “Restaurants seem to be more aggressive than retailers. They seem to be more aggressive in terms of finding good spaces.”

Because of their more complex construction, restaurants’ terms are longer than specialty stores. Typically, a shop will have a five-year lease with two five-year extensions, whereas a restaurant will have a 10-year base lease. Some anchors even will have a 20-year initial term.

Another tactic for developers to attract and keep tenants is to go above and beyond what they typically deliver to a tenant. While many offer a vanilla shell (with the stock room, demising walls, separating walls for the office, floor, toilets and, occasionally, the ceiling in place), Trinity Town Center’s spaces, for instance, will be more finished prior to tenant turnover.

Even so, the presence of additional uses becomes one more thing for a retailer to assess when selecting sites. That means that the length of the deal cycle has nearly doubled, JLL’s Bemis said: A lease that took 60 days to finalize not that long ago can take 120 days now.

With all the complexities of mixed-use, as well as the additional costs, some projects have slowed down, as financing has tightened.

“Multi-use developments that were well along in the pipeline are continuing,” Bemis said. “Where the issue has reared its ugly head is the beginning phases of developments. But good developments are certainly getting done.”

This isn’t the first downturn the industry has experienced, and the result is that most developers are not down-scaling their expectations or leasing plans.

“The same thing occurred in 2000, and in 1990,” Bemis said. “There were conversations then that people would not go back to luxury spending. When the economy turned, people went back.”

And all note that the current economic situation will change, possibly by the middle of next year.

“A year from now, the market will be vastly improved,” McCorkle said. That should encourage stores that had been reluctant to commit to finally sign a lease.

In fact, “I believe we will see the economy turn,” Bemis said. “We’re pretty much at the bottom, and we might bump along at the bottom for a few months.”

By the second half of 2009, Bemis said, consumer confidence should rebound, partly because the political uncertainties of this year will be resolved.

“It’s just a pause in a long-term trend,” Lutgert’s McCorkle said. “People like the fit and feel of a lifestyle center. They like the type of environment [that a mixed-use project offers]. People are social beasts.”