Once upon a time when the economy was booming and landlords had a large waiting list of potential tenants wanting to get into their shopping centres, they developed a one-sided rental strategy. They enticed the major retailers with ridiculously low rentals and building allowances and decided to subsidise these low rentals by increasing the rentals of the minor retailers. While it is appreciated that the major tenants should have a rental benefit, the gap between the major tenants and the minor tenants became too big.
Then the economy turned, online shopping increased, unemployment increased, consumer confidence dropped and this resulted in reduced retail sales. The Landlords now find themselves “between a rock and a hard place” Major tenants e.g. Edcon have come to them cap in hand to get rent reductions, resulting in even lower rentals from these major tenants and minor tenants are closing or defaulting on rental payments.
We are now in a situation where we have empty shops in most major shopping centres. So, have the ‘chickens have come home to roost’ for landlords? Can they sustain their traditional business model in this economic environment? Or is the time ripe for disruption in the property industry, with potentially high gains for first movers?
So what can be done?
- Landlords should reconsider their old strategies and admit they have a problem.
- All their tenants are having to discount to try and maintain sales. Perhaps the landlords should consider going to their minor tenants and offering them a 20% rental deduction for January and February to help them over the quiet period.
- Landlords should approach their good minor tenants and offer them a new long term lease with market related rentals and escalations.
- Landlords should increase their marketing activities with exciting promotional activity. Many tenants don’t believe their marketing contributions are being used effectively.
- Try to change the tenant mix so they can have tenants that pull customers to the centre on a daily basis e.g. colleges, medical centres etc. The centres with a combination of shopping, offices and residential may have better potential to succeed due to more feet and “captive audiences”.
- Try to work with online sales by creating collection hubs and increasing the importance of “clicks and bricks” as an omnichannel strategy for retailers. An example of this is the big Takelot collection point on the N1 between Johannesburg and Pretoria, combined with convenience retail and fast food at the same centre.
We are definitely going into interesting times. There is no sign that the economy is about to turn, and we will all watch with interest how the landlords react. So landlords step forward – changes are inevitable! Admit that the business environment is changing and make some hard calls or innovate to keep our retail market viable and able to thrive again.