Rethinking Strip Malls: Q&A with Polsinelli’s Jared Rothkopf
Neighborhood strip malls are starting to regain attention. Factors such as the growth of hybrid shopping behaviors (a combination of in-store and online shopping), demand for last-mile delivery hubs, and the strength of the economy have made strip malls more appealing again. These retail centers are becoming attractive for local businesses, service-oriented tenants, and e-commerce fulfillment operations that benefit from being in closer proximity to customers.
As a result, investors are beginning to reconsider the potential of strip malls, recognizing that they may still offer value through strategic tenant mix and location advantages. This shift is helping to revitalize these retail properties, breathing new life into what were once declining assets in many parts of the country.
Jared Rothkopf, leasing attorney and shareholder at Polsinelli, discussed the adjustment by investors in the retail sector and the bidding war that has emerged for shopping center space. Rothkopf also touched on the impact of rising costs on lease negotiations, the amenities that draw in shoppers and how landlords are incorporating them in their decision making, and the leverage landlords have over tenants given the scarcity of supply of new shopping centers, among other topics.
CM: Tell us about the bidding war for top spaces in retail real estate and the heavy volume of transactions being seen recently.
JR: It’s been an extremely busy few years. Vacancies caused by the Bed Bath and Beyond’s of the world have led to a race to backfill this space and retailers pounce when space become available. To a certain extent, landlords have had the luxury of evaluating multiple offers on spaces so they can get the best deal. Once a letter of intent (LOI) is signed it’s a race to finish the lease – time has been known to kill even the best of deals.
CM: How does the rising cost of shopping centers impact lease negotiations?
JR: Costs are rising everywhere, and landlords are not immune to inflationary pressures. Construction costs have a huge impact on lease negotiations and pricing out those costs up front is hugely important. I’ve seen deals get stuck because the HVAC units need to be replaced and the cost and lead time on those units can easily throw a deal out of balance.
CM: What amenities are most effective in attracting shoppers to a shopping center and how are developers incorporating them?
JR: Lifestyle centers are what attracts the most shoppers for the longest periods of time. So, in addition to having a great tenant mix with shopping, food and activities (pickleball, bowling, etc.), you’ll also see outdoor gathering areas, playgrounds, maybe even an area for live music. Whatever owners can do to get people to their Center and keep them there – that’s the key.
CM: What leverage do landlords have over renters
JR: Smaller tenants and startups are at the mercy of landlords to some degree. The bigger the risk of failure by the tenant the bigger the security package or guaranty from the tenant’s principals. In these scenarios, the landlords have a lot of leverage and there’s not a ton of lease negotiation.
CM: What due diligence factors should investors consider before acquiring an existing shopping center?
JR: It’s the classic things and it could be a really long list: Are there any environmental issues or structural defects that haven’t been addressed? What sort of capital expenses are going to be required to maintain the Center for the next five to 10 years? It sounds simple, but what do the leases say? You never know what kind of surprises can be buried in old leases, like a tenant improvement allowance at renewal that a buyer will need to factor into their pro forma. Are the tenants paying on time? That last thing you want is to inherit a habitual late payer.
CM: What advice do you have for landlords negotiating with big-box retailers today?
JR: Be really careful when you negotiate the LOI. Kicking the can down the road from the LOI to the lease is asking for trouble. The big box retailers are leaving nothing to chance in the LOI process, so you have to be sure you’re comfortable with the deal you’ve struck before you go to lease. Trying to re-trade an LOI term during the lease process can be done, but you’re going to end up with a protracted and costly lease negotiation process.
