Anchors away: Loss of an anchor store can be devastating to a shopping center

By Bernadette Starzee
BridgeTower Media Newswires

LONG ISLAND, NY - People visit the supermarket often and when they do, they might stop at a dry cleaner, liquor store or hair salon in the same shopping center. As the so-called anchor store in many shopping centers, supermarkets routinely drive traffic to the center's smaller stores.

But when a supermarket or another good anchor store closes its doors a scenario that has happened with increasing frequency over the last decade it can be devastating to not only the landlord, but the center's other stores, as well.

"In some cases, an anchor's departure can be the beginning of the end for a shopping center," said Mark Kaplan, chief operating officer/principal of Ripco Real Estate Corp., a Jericho-based commercial real estate firm that focuses on retail. "But in other cases, it's an opportunity."

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Why anchors go away

When an anchor store goes dark, it's not necessarily because the center was bad.

"Sometimes it's because of a corporate bankruptcy or restructuring that had little to do with that location or shopping center," Kaplan said.

A&P's 2015 bankruptcy led to the closure of 51 Pathmark and Waldbaum's stores on Long Island, some of which "were very high-grossing stores in good shopping centers," Kaplan said. "In those cases, an anchor tenant's departure can be seen as an opportunity for the landlord to increase revenue."

Anchors typically pay less rent per square foot than inline stores, in part because they're taking more space, but also because they're supposed to be a traffic generator.

"You may have an anchor that is paying below-market rent; maybe it's an old lease, and the market has improved, and the shopping center has improved, and the landlord is burdened by the below-market rent," Kaplan said. "A quality shopping center in a quality area may welcome the opportunity to re-lease that space."

The anchor tenant may have come into the center with a laundry list of exclusive rights that hamper the landlord in leasing the rest of the center. For instance, a supermarket may have a lease that precludes the center from welcoming a florist, bakery or pharmacy, because the supermarket provides all those services.

"The landlord may have felt that it needed to give the anchor those exclusives at the time; the anchor's departure may be an opportunity to eliminate a lot of exclusives," noted Kaplan, adding that some anchor tenants will have in their lease "a diagram of the whole property with shaded areas over parts of the parking lot where the landlord is not permitted to build. The departure may free up the landlord to build a bank or fast-food restaurant, for example."

Charles Lefkowitz, president of Louis Lefkowitz Realty and operating partner of Realty Three, both in Jericho, has shopping centers around the nation.

"I have a shopping center in the Midwest where I'm losing a 107,000-square-foot Kmart, which was paying under $5 per square foot," he said. "As much as we ­didn't want to see Kmart go, we're looking at it as an opportunity to get more revenue. There are a half-dozen other tenants that we're talking to."

The less debt a landlord has in a center, the more likely it will be able to find a new anchor tenant and redevelop the property, Lefkowitz said, noting, "The more debt the landlord has, the more pressure it will feel to do something quickly it may force a sale."

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Troubles for other tenants

Even if the center ultimately lands a better anchor, "the smaller satellite stores certainly suffer in the interim," Lefkowitz said. "There are examples all over Nassau and Suffolk. Waldbaum's and some of the King Kullen stores have darkened, and for some of the smaller merchants, foot traffic is way down."

The smaller tenants don't necessarily suffer in silence. If the shuttered anchor store remains vacant for months or longer, the smaller stores may request some kind of concession from the landlord.

Some national tenants have a co-tenancy clause as standard language in their lease agreements that specifies some sort of contingency should the anchor be vacant for a certain period of time.

"Co-tenancy has become more and more common for the big boys, who have clauses in their lease agreements across the country," Ken Schuckman, president of Schuckman Realty in Lake Success, said. "We had a situation where HomeGoods had co-tenancy with a supermarket, stating that it could get out of its lease if the supermarket was dark for more than six months. And that's exactly what happened."

"When a national tenant comes in, it may say, 'I'm coming into your center because you have a grocery store there I wouldn't come otherwise,'" Kaplan said. "They'll say, 'If the grocery store leaves and it's not replaced within a certain amount of time, such as a year or longer, then one of several things could happen.'"

The agreement may allow the tenant to terminate its lease or pay just a contracted portion of its base rent. Alternately, it could pay a contracted percentage of sales or some sort of hybrid between reduced base rent and percentage of sales.

"If you're a landlord that gave out a lot of these co-tenancy clauses, it could be the beginning of the end if an anchor leaves, even if it didn't leave for a reason that had anything to do with your center," Kaplan said. "You could be a great shopping center, and you have tenants that all do well. But maybe you have a smaller tenant who is opportunistic. Although it wants to stay, it may exercise its ability to terminate the lease and then renegotiate."

Some of Lefko­witz's out-of-town centers that are anchored by a movie theater have food tenants that will get some sort of concession if the theater goes dark. But typically, co-tenancy clauses are the domain of sophisticated, national tenants.

"The pizza places, dry cleaners and Chinese restaurants don't have clauses like that in their leases," said Michelle Marie Zere, executive vice president of Ronkonkoma-based Zere Real Estate Services.

Even without a co-tenancy clause, "tenants may approach the landlord and try to negotiate for some sort of concession if an anchor's departure is hurting this business," Kaplan said, noting the concession could come in the form of expanding their use clause. "Say you have a deli whose use clause says it can sell sandwiches and salads. If business drops off because the anchor tenant left, maybe it can now be allowed to also sell frozen yogurt."

In other cases, the tenant may say it needs some sort of rent concession. If the deli pays $1,000 a month in rent, it may ask to have $200 knocked off.

"The landlord may say, 'I won't reduce the rent, but I'll defer that $200 until you can afford to pay it,'" Kaplan said. "Real estate's fun in the sense that the concession could be anything. There are many ways that landlords can work with smaller tenants if their business has been affected." But therein lies the rub: The tenant will have to provide numbers to show that its business has been negatively impacted.

"An experienced landlord will want proof," Kaplan said. "They'll say, 'Show me what's changed.'"

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Not all anchors are created equally

Not every anchor is a grocery store. Some shopping centers are anchored by a health club, for instance.

"Gyms are very parking-intensive, and if the gym leaves, it may actually help some of the smaller inline tenants," Kaplan said. "Maybe you have a high-quality bakery or restaurant with good business, but its customers can never find parking because the gym is so busy. Those businesses may be better off without the anchor.

"If you have an anchor tenant that isn't driving traffic to the other stores they're not acting as a traditional anchor it may be a net zero for your other tenants," Kaplan added.

As retail continues to evolve in response to the internet, and 30 to 40 boxes remain available on the Island, "there has been a correction that has hit the rents," Schuckman said. "It's providing an opportunity for other uses that could not come to Long Island before because of the high barrier to entry. Hobby Lobby came into the market recently, and they're looking at a dozen more sites. We met with an entertainment concept last week almost like a Dave and Buster's competitor that wouldn't have been considered a potential anchor before, but landlords are receptive. Anytime there's a big bankruptcy, my line is 'Chaos breeds opportunity.' More transactions will be done as a result. It may not be the same uses, and it will affect smaller stores. If a supermarket is replaced by a bowling alley, the smaller stores may suffer."

As Kaplan noted, it will be difficult to replace all the supermarkets, with the internet as well as wholesale clubs and other retailers taking business from supermarkets.

"In some spots, there may never be a grocery store ever again," he said. "People are buying a lot of nonperishables that they would have bought in the supermarket on the internet, and we may not need as many grocery stores. It's always been a low-margin business. It's going to be a divide between the haves and have-nots. The good shopping centers with the good demographics, even if they lose one, they will get one back in due time. But the fringe centers, the B or C ones, are going to have trouble attracting a new large tenant."

Published: Thu, Aug 24, 2017

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