May 13, 2003

The Retail Industry in 2003

Holland & Knight Newsletter
Janis Boyarsky Schiff

We live in a challenging world facing challenging times.  Retail sales and development in the past 12 months have been significantly affected by these challenges. The 2002 holiday season sales and the resulting post-holiday season retrenchment by many retailers is evidence of these challenges.   The downturn in the economy and the impending war in Iraq caused many retailers to stall or significantly reduce expansion plans.  Consumers are looking for bargains and many retailers are responding with sales and price reductions to bring in the shoppers and move the merchandise.  This has reduced profits and has reduced the ability of retailers to free up funds for expansion.

What does this all mean for real estate professionals in the retail industry?  First and foremost, it means that we must be flexible and creative in order to facilitate growth and expansion going forward. We must enable our clients to “make the deal” despite the challenges facing the industry.  Those of us who have experienced these business cycles before have learned to be flexible and adjust to changing times in order to facilitate the desired expansion and growth.  “Making the deal” has become increasingly important and now means that retailers and developers must be “partners” in the success of a project.  The brokers, lawyers, architects, engineers and lenders also must be essential players in facilitating the process.

Money to finance retail projects is readily available provided there is significant commitment by the retailers to the project.  The “retail mix” of a project has become key in both the marketing and financing of major retail projects.  Lifestyle-type retailers, as opposed to straight discount retailers, have become the key to many of the new retail projects on the drawing board.

In addition, the “credit” of a specific tenant or tenants has become the guiding force in determining the nature and structure of the project.  We are now seeing grocery stores and traditional service uses such as dry cleaners and hair salons in the same projects as lifestyle tenants such as Pottery Barn and Crate and Barrel.  This mix enables the developers to mix the economic risk and assure consumers will be at the project regardless of the condition of the economy.  Creativity in mixing uses, designing unique sites and integrating lifestyle and service uses has been the challenge for developers this past year.  Many outdated malls have been turned “inside out” and we now are seeing uses such as home improvement stores and grocery stores as replacement “anchors” for dark department stores.  All of this has dramatically changed the structure of the deals and issues such as co-tenancy, operating covenants and assignment and subletting.

The articles in this issue of Property Writes address many of these challenges.  The article by Maura B. O’Connor and Brett L. Hayes on due diligence in the financing of leases is helpful in working through some of the current issues lenders are considering and addressing relating to underwriting leases.  The article by Al Daspin and James Marshall on co-tenancy attempts to practically address how co-tenancy provisions should be addressed in leases so as to enhance their intended usefulness.  Our lawyers remain up to date on all of the current retail trends in order to service our clients at the highest level.

Holland & Knight’s lawyers and professionals are uniquely qualified to address issues facing retail developers, managers, lenders, brokers and other professionals and “make the deal” in these changing times.  We are proud to have worked with our clients this past year to achieve their goals. 

During the past year, we have worked with Federal Realty Investment Trust to complete the leasing at Santana Row in San Jose, California, have continued the ongoing leasing at Virginia Beach Town Center in Virginia Beach, Virginia, and Ocean Walk, in Daytona Beach, Florida and have worked with developers throughout the country on grocery anchored, big box, street retail malls and lifestyle centers, as well as mixed use projects in major urban redevelopments.  We look forward to continuing in this effort and leading the legal market in retail development and leasing in the coming year.  Please contact us with your thoughts, ideas and business opportunities. 


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